Softer economic data reaffirms prospect of a soft landing

REAL ECONOMY BLOG | February 27, 2024

by RSM US LLP

The Federal Reserve’s restrictive monetary stance showed that it continues to affect the economy in the first two months of the year.

In other words, the Fed is getting closer to its goal of achieving a soft landing when the economy cools back down to a sustainable level of growth with inflation under control.

January’s spending on durable goods orders fell by a sharp 6.1%, driven mostly by a drop in demand for Boeing’s planes and defense spending. Still, when both of those components are stripped away, orders for core capital goods—a proxy for future business equipment spending—rose by only 0.1%, following a downward revision to December’s number from up 0.2% to down 0.6%.

The bright spot was the increase in shipments of core capital goods, which rose by 0.8% in January, the highest monthly increase in a year. It certainly will help add to overall gross domestic product in the first quarter, which in our opinion will be stronger than what the market is expecting.

But in the longer horizon, it looks less likely that shipments will continue to stay that strong based on the slowdown in orders. Both series are beginning to show signs of topping out on a nominal basis. When inflation is added to the mix, spending volume looks a lot less impressive. That shows the impact of restrictive monetary policy on investment spending, a reason why we think the Federal Reserve should cut rates this year.

Consumers seem to agree on a slowdown ahead as the Conference Board’s consumer confidence Index dropped in February despite the market’s expectation of further improvement. The index fell to 106.7 in February from 110.9 in January.

That is the first drop in 5 months, driving in part by a less abundant job market according to the survey’s respondents. The labor differential index—measured the difference between job-plentiful and job-hard-to-get responses—falls to 27.8 from 31.7, the first drop in 4 months.

While February’s labor differential index remains above what it was in the second half of last year, it does suggest a drop in job gains ahead of the highly anticipated job reports coming out next week. But it should not be a reason for any concern as we continue to expect job gains to remain stronger than what the economy needs to achieve a soft landing.

Inflation expectations for the next 12 months continue to fall, down to 4.2% from 4.3% in January, and from 5.4% a year ago. In terms of spending plans, the respondents indicated more appetite for automobile and major household appliance purchases while home buying plans fell slightly.

The takeaway

The economy is expected to cool down in 2024, yet on a much stronger trajectory than previously thought given the recent economic data. Even though we might not see the same kind of growth at 3% to 5% like last year, the economy is likely to grow above 2% in the first quarter. and if you put that in context, that is still higher than the long-run growth rate, which has been only around 1.8%.

This article was written by Tuan Nguyen and originally appeared on 2024-02-27. Reprinted with permission from RSM US LLP.
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