U.S. Households Lifting Economy After Being Stung by Inflation Last Year
from the WSJ - Looks looks like senile Joe is doing well by us. The economic depression Kevin and Mitch promised we would be in the middle of, right now, did not happen.
Fresh figures on jobs and prices drove the economy’s surprising vigor this year, joining rising household incomes, consumer resilience and other data that have persuaded investors the Federal Reserve’s battle against inflation is likely to be a longer one than they hoped.
Layoffs remained historically low last week while supplier prices increased in the year through January by 6%, faster-than-expected but down from 6.5% in December, the Labor Department said Thursday.
In another sign of still-hot labor demand, the department reported earlier this month that hiring surged in January and unemployment fell to a 53-year low.
Moreover, slowing inflation, pay raises negotiated last year, cost-of-living adjustments for retirees and state tax cuts have lined up to lift consumer purchasing power, fortifying spending and economic growth at a time when many analysts were predicting a slowdown or even recession. This marks a turnabout for households that were squeezed last year by high inflation, climbing interest rates and the end of Covid-related federal relief programs.
Among the recent evidence: Retail sales rebounded in January, rising 3% on the month following back-to-back monthly declines in November and December.
Stocks fell Thursday after the new data boosted concerns the Fed would have to raise interest rates higher for longer than otherwise to combat inflation by slowing the economy. The S&P 500 dropped 1.3%. The Dow Jones Industrial Average slipped 1.3%, while the tech-focused Nasdaq Composite lost 1.8%. Government-bond yields rose, with the yield on the benchmark 10-year U.S. Treasury note increasing to 3.842% Thursday from 3.806% Wednesday. Bond prices fall when yields climb.
Fed officials projected in December they would increase their benchmark federal-funds rate to a range between 5% and 5.25% in 2023 and hold it there through year’s end. Earlier this year, investors disagreed, betting that slowing inflation and economic growth would lead policy makers to stop raising rates sooner and cut them later this year. By Tuesday, the recent data had prompted futures market traders to start mirroring the central bank’s expectations.
In recent weeks, “there has been a massive swing from pricing in a recession, the Fed is done, [rate] cuts in the second half of this year…to no cuts, rates staying higher for longer,” said John Madziyire, a senior portfolio manager and head of Treasurys and inflation at Vanguard Fixed Income Group.
The swing has been particularly noticeable in the bond market, where U.S. Treasurys have reversed an early-year rally. That has sent the 10-year Treasury yield back to around where it finished last year, just above 3.8%.
Stocks have also edged lower in recent weeks, reflecting investors’ concerns about a more aggressive Fed, but have so far avoided major losses. The S&P 500 has slipped about 2% since Feb. 2, the day before the release of the surprisingly strong January jobs data. Up to the employment report, the index had gained nearly 9% since the end of last year.
The economic outlook remains uncertain. The Fed could respond to a pickup in growth and inflation with more forceful action on interest rates, causing a more severe downturn than otherwise. If firms lay off more workers in response to profit pressures, household incomes could sink and spending follow, as many analysts have predicted for months.
For now, the hot start to the year raises the prospect of an alternate scenario in which economic growth accelerates.
“The positive trend in incomes is going to be a source of support for this economy,” said Rubeela Farooqi, chief U.S. economist for High Frequency Economics, a forecasting firm. Ms. Farooqi has been going against a Wall Street consensus and predicting the U.S. will avoid recession this year. She said the outlook for household incomes is central to her prediction. “Wage and salary growth is now outstripping inflation.”
Ms. Farooqi estimates that total household income, adjusted for inflation and taxes, will rise at a 2.5% annual rate in the first quarter and a 2.3% rate in the second, after contracting by 6.4% last year.
Other forecasters, including economists at Goldman Sachs, J.P. Morgan and Morgan Stanley, are making similar income forecasts. “Workers are effectively expecting to be made whole this year,” said Chris Varvares, co-head of U.S. economics at S&P Global Market Intelligence, which projects inflation-adjusted incomes will grow at a 5.3% annual rate in the first quarter. That would be the biggest increase since early 2021, when federal pandemic relief checks were sent to millions of households.
Mr. Varvares said recent economic reports have him rethinking his recession forecast. It could come later and be milder than he thought, he said. Goldman Sachs has lowered its estimate of the probability of recession to 25% from 35%.
A great deal hangs on the path of inflation. Though high, the January rate of 6.4% marked the seventh straight monthly decline from a recent peak of 9.1% in June. If it keeps slowing, the Fed could pause rate increases in the months ahead. But if inflation accelerates, then more rate increases and another hit to markets and the economy loom.
Economists surveyed by The Wall Street Journal in January projected inflation will slow to 3.1% by year-end. Average hourly earnings of private-sector workers rose 4.4% in January from a year earlier, meaning wages are potentially on track to outstrip inflation after months of falling behind. Retirees could see even more catch-up this year, thanks to an 8.7% cost-of-living adjustment for 2023 in Social Security checks.
Tyler Pack, a supplier-delivery planner at an energy company, got a promotion in December and a 10% raise starting in January. Mr. Pack went to Dairy Queen to celebrate his new position and has much bigger spending plans for the future—he is saving to buy a Mercedes-Benz. “I hope interest rates cool,” he said, since the car-loan interest rate of 6% he was recently quoted is much higher than the 2.3% rate on his current vehicle, which he bought in late 2020. He is also planning to take a vacation in Florida this spring.
“I’m not cutting back on things, just being much more careful about where I purchase things from,” said the 33-year old, who lives outside Pittsburgh.
Many consumers are still smarting from last year’s inflation squeeze.
Joe Wallace, of Palm Desert, Calif., received his first Social Security check in December after turning 66 last year. “I haven’t got a raise since Covid hit, I made up for it by taking Social Security,” he said.
Mr. Wallace, the chief executive of an economic development nonprofit organization, said he was pleased to get a roughly $300 increase in January, but “it’s not going to make me go out and do something I wasn’t going to do anyway.”
“That’s a Valentine’s dinner for my wife and I,” he said. Last year’s inflation drove the couple to cut down on eating out from five nights a week to three, and he has “slowed down on marginal things, like drinks and pieces of cake” at restaurants. He is also scrutinizing travel expenses like plane rides and car hires.
“Plane tickets that used to be $350 to visit new grandchildren, now they’re $900,” he said.
Mr. Wallace is considering putting off full-fledged retirement due to inflation. “It’s going to take a 50% increase in equities to get you back to where you were three years ago,” he said.
“People save all their lives and then this thing comes along,” he said, referring to the pandemic, “and inflation follows it and the security in your mind goes away.”
Household income has been exceptionally volatile in recent years, a symptom of broader economic turbulence unleashed by Covid-19 and the government’s response to it. Incomes adjusted for taxes and inflation soared in 2020 and early 2021, thanks to relief checks, then tumbled in 2022 as the aid programs ended and inflation soared to a 40-year high.
Another source of support for households are state tax cuts and aid. During 2020 and 2021, 43 states cut taxes and a dozen are considering additional individual cuts this year, according to the Tax Foundation, a nonprofit specializing in tax policy research. More than a dozen states issued rebates and refunds in 2022.
Layoffs remained historically low last week while supplier prices increased in the year through January by 6%, faster-than-expected but down from 6.5% in December, the Labor Department said Thursday.
In another sign of still-hot labor demand, the department reported earlier this month that hiring surged in January and unemployment fell to a 53-year low.
Moreover, slowing inflation, pay raises negotiated last year, cost-of-living adjustments for retirees and state tax cuts have lined up to lift consumer purchasing power, fortifying spending and economic growth at a time when many analysts were predicting a slowdown or even recession. This marks a turnabout for households that were squeezed last year by high inflation, climbing interest rates and the end of Covid-related federal relief programs.
Among the recent evidence: Retail sales rebounded in January, rising 3% on the month following back-to-back monthly declines in November and December.
Stocks fell Thursday after the new data boosted concerns the Fed would have to raise interest rates higher for longer than otherwise to combat inflation by slowing the economy. The S&P 500 dropped 1.3%. The Dow Jones Industrial Average slipped 1.3%, while the tech-focused Nasdaq Composite lost 1.8%. Government-bond yields rose, with the yield on the benchmark 10-year U.S. Treasury note increasing to 3.842% Thursday from 3.806% Wednesday. Bond prices fall when yields climb.
Fed officials projected in December they would increase their benchmark federal-funds rate to a range between 5% and 5.25% in 2023 and hold it there through year’s end. Earlier this year, investors disagreed, betting that slowing inflation and economic growth would lead policy makers to stop raising rates sooner and cut them later this year. By Tuesday, the recent data had prompted futures market traders to start mirroring the central bank’s expectations.
In recent weeks, “there has been a massive swing from pricing in a recession, the Fed is done, [rate] cuts in the second half of this year…to no cuts, rates staying higher for longer,” said John Madziyire, a senior portfolio manager and head of Treasurys and inflation at Vanguard Fixed Income Group.
The swing has been particularly noticeable in the bond market, where U.S. Treasurys have reversed an early-year rally. That has sent the 10-year Treasury yield back to around where it finished last year, just above 3.8%.
Stocks have also edged lower in recent weeks, reflecting investors’ concerns about a more aggressive Fed, but have so far avoided major losses. The S&P 500 has slipped about 2% since Feb. 2, the day before the release of the surprisingly strong January jobs data. Up to the employment report, the index had gained nearly 9% since the end of last year.
The economic outlook remains uncertain. The Fed could respond to a pickup in growth and inflation with more forceful action on interest rates, causing a more severe downturn than otherwise. If firms lay off more workers in response to profit pressures, household incomes could sink and spending follow, as many analysts have predicted for months.
For now, the hot start to the year raises the prospect of an alternate scenario in which economic growth accelerates.
“The positive trend in incomes is going to be a source of support for this economy,” said Rubeela Farooqi, chief U.S. economist for High Frequency Economics, a forecasting firm. Ms. Farooqi has been going against a Wall Street consensus and predicting the U.S. will avoid recession this year. She said the outlook for household incomes is central to her prediction. “Wage and salary growth is now outstripping inflation.”
Ms. Farooqi estimates that total household income, adjusted for inflation and taxes, will rise at a 2.5% annual rate in the first quarter and a 2.3% rate in the second, after contracting by 6.4% last year.
Other forecasters, including economists at Goldman Sachs, J.P. Morgan and Morgan Stanley, are making similar income forecasts. “Workers are effectively expecting to be made whole this year,” said Chris Varvares, co-head of U.S. economics at S&P Global Market Intelligence, which projects inflation-adjusted incomes will grow at a 5.3% annual rate in the first quarter. That would be the biggest increase since early 2021, when federal pandemic relief checks were sent to millions of households.
Mr. Varvares said recent economic reports have him rethinking his recession forecast. It could come later and be milder than he thought, he said. Goldman Sachs has lowered its estimate of the probability of recession to 25% from 35%.
A great deal hangs on the path of inflation. Though high, the January rate of 6.4% marked the seventh straight monthly decline from a recent peak of 9.1% in June. If it keeps slowing, the Fed could pause rate increases in the months ahead. But if inflation accelerates, then more rate increases and another hit to markets and the economy loom.
Economists surveyed by The Wall Street Journal in January projected inflation will slow to 3.1% by year-end. Average hourly earnings of private-sector workers rose 4.4% in January from a year earlier, meaning wages are potentially on track to outstrip inflation after months of falling behind. Retirees could see even more catch-up this year, thanks to an 8.7% cost-of-living adjustment for 2023 in Social Security checks.
Tyler Pack, a supplier-delivery planner at an energy company, got a promotion in December and a 10% raise starting in January. Mr. Pack went to Dairy Queen to celebrate his new position and has much bigger spending plans for the future—he is saving to buy a Mercedes-Benz. “I hope interest rates cool,” he said, since the car-loan interest rate of 6% he was recently quoted is much higher than the 2.3% rate on his current vehicle, which he bought in late 2020. He is also planning to take a vacation in Florida this spring.
“I’m not cutting back on things, just being much more careful about where I purchase things from,” said the 33-year old, who lives outside Pittsburgh.
Many consumers are still smarting from last year’s inflation squeeze.
Joe Wallace, of Palm Desert, Calif., received his first Social Security check in December after turning 66 last year. “I haven’t got a raise since Covid hit, I made up for it by taking Social Security,” he said.
Mr. Wallace, the chief executive of an economic development nonprofit organization, said he was pleased to get a roughly $300 increase in January, but “it’s not going to make me go out and do something I wasn’t going to do anyway.”
“That’s a Valentine’s dinner for my wife and I,” he said. Last year’s inflation drove the couple to cut down on eating out from five nights a week to three, and he has “slowed down on marginal things, like drinks and pieces of cake” at restaurants. He is also scrutinizing travel expenses like plane rides and car hires.
“Plane tickets that used to be $350 to visit new grandchildren, now they’re $900,” he said.
Mr. Wallace is considering putting off full-fledged retirement due to inflation. “It’s going to take a 50% increase in equities to get you back to where you were three years ago,” he said.
“People save all their lives and then this thing comes along,” he said, referring to the pandemic, “and inflation follows it and the security in your mind goes away.”
Household income has been exceptionally volatile in recent years, a symptom of broader economic turbulence unleashed by Covid-19 and the government’s response to it. Incomes adjusted for taxes and inflation soared in 2020 and early 2021, thanks to relief checks, then tumbled in 2022 as the aid programs ended and inflation soared to a 40-year high.
Another source of support for households are state tax cuts and aid. During 2020 and 2021, 43 states cut taxes and a dozen are considering additional individual cuts this year, according to the Tax Foundation, a nonprofit specializing in tax policy research. More than a dozen states issued rebates and refunds in 2022.
