Jan 26, 2024 - Economy

"Looks upbeat": How the U.S. economy reversed a gloomy narrative in a year

Illustration of the U.S. flag with one stripe moving upward like a chart trend line

Illustration: Sarah Grillo/Axios

Nearly all the indicators released in recent weeks tell the same story: evaporating inflation alongside still-humming economic activity.

Why it matters: It's a turnaround from earlier in the inflation fight, when strong data may have spooked financial markets and policymakers. Now it's a sign that inflation can be beaten without a painful downturn.

What they're saying: "Any way you look at it, the American economy looks upbeat," Lael Brainard, the top White House economic adviser, said during a briefing with reporters Friday morning.

  • "We looked historically: We've never had a year where inflation has declined this fast while the economy has grown above trend, and unemployment has remained stable at a low rate."

What's new: Some of the last major data points before Fed officials' meeting next week were released Friday morning.

  • In December, the central bank's preferred gauge of inflation, the Personal Consumption Expenditures Price Index, was up 2.6% over the prior year, in line with its November reading.
  • But the core measure that excludes energy and food prices — which is considered to be a better gauge of underlying inflation — was 2.9%, compared to 3.2% the previous month.
  • Even more impressive is that the core index is running at a 1.5% annualized rate over the last three months — below the Fed's 2% target.

Between the lines: The ongoing easing of price pressures came as Americans' incomes continued to increase in real terms and shoppers kept spending at a healthy pace.

  • Disposable income, adjusted for inflation, rose by 0.1% after a 0.5% increase in November.
  • Consumer spending increased by a half percentage point in real terms, the same as the prior month.

The intrigue: It's a very different dynamic than just a year ago. Recall in early 2023 when a run of strong data showed booming consumer spending and eye-popping job gains — paired with hotter inflation data that showed core PCE running at a nearly 3% three-month annualized rate.

  • At the time, it raised concerns the Fed might have to slam the brakes on the economy even harder.

Where it stands: Now officials face the opposite scenario — inflation looks to be cooling much faster than many expected. That has allowed them to open the door to rate cuts later this year — though exactly when that will happen is still hazy.

The bottom line: "[W]e are no longer allowed to say 'we are landing softly' when we have been sitting on the runway for many months," Arindrajit Dube, an economics professor at University of Massachusetts Amherst, tweeted in part.

  • "The great inflation of 2021/22 is over and that's it."

What's next: The Employment Cost Index will be released Wednesday, hours before Fed officials will likely stand pat on rates but possibly hint at when cuts could occur.

  • Meanwhile, the January jobs report is out next Friday.
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