The Economy Began In 2023, Warmer Than The Weather.

The “no landing” economy is here to welcome you. Economists are now embracing a new theory: the economy completely avoids a downturn and buzzes along with the job market intact and inflation tamed just as Americans had grown accustomed to the idea that maybe the economy would escape a downturn in 2023 and glide to the proverbial “soft landing” of slowing inflation and slow growth.

Better-than-expected news on the labor market, retail sales, and real estate market have strengthened the optimists’ perspective in recent days, lending validity to the theory. Yet, at the same time, specific statistics indicate that pricing pressures continue even as the Federal Reserve threatens more pain in the form of interest rate rises, and inflation is proving to be more stubborn than anticipated. Goldman Sachs CEO David Solomon stated on Tuesday in Miami at an industry conference that “conversation has turned to be a little more dovish in the CEO class, that we can maneuver across this in the United States with a gentler economic landing.”

The economic evaluations’ volatility is somewhat comparable to the renowned five stages of mourning, which psychiatrists think people experience after suffering a massive loss, such as the death of a beloved one. There is enough evidence for optimists and doomsayers to hang their hats on, given the uneven and unusual recovery from the coronavirus during the previous three years, which included a tremendous loss in economic activity and employment and the quickest and strongest rebound. Yet one thing is obvious: Compared to what was anticipated at the finish of last year, the economy today is doing better. The Federal Reserve Bank of Atlanta’s widely used GDP Now model predicts that the U.S. economy will expand at a yearly growth of 2.5% in the first quarter. This estimate gradually rose after falling as low as 0.7% in late January.

At a Wednesday webinar presented by the Travelers Institute, retired White House chief economist LaVaughn Henry declared, “We are at a moment of strong economic growth.” We don’t anticipate a harsh landing. In a way, the more upbeat outlook contrasts with many potentially depressing economic reports. The consumer price index increased by 0.5% month to month in January, a slight increase from December, but the annual rate fell again, marking the seventh straight softening. Bond yields have increased as markets factor in higher interest rates from the Fed, pushing short-term Treasuries just above the 5% barrier for the first time since 2007. That is seen as a conviction that the Fed will be able to manage inflation, even though it might take somewhat longer.

Mortgage rate increases continue to exert significant pressure on the housing market. Still, builders showed more optimism in February, according to the National Association of Homebuilders, who found that mood increased to its highest level in ten months. Since 2013, it was the biggest monthly rise. Yet in certain significant urban regions, rents, one of the main factors contributing to recent inflation estimates, have softened or even decreased. According to the builder study, fewer builders are now giving reductions or other incentives to motivate customers: In February, 31% of builders dropped house prices, compared to 35% during December and 36% in November; the average price reduction was 6% in February, down from 8% in December: However, although 57% of employers provided incentives in February, that number was lower than the 62% recorded in December and the 59% in November.

Nonetheless, consumers are flashing their cash, as seen by the retail sales comeback of 3% in January following two months of decline. Most expenditures were made at pubs and restaurants, where sales rose by 7.2%, the highest since March 2021. The practice has been referred to as “revenge spending” by some economists, who note that major retailers have witnessed a significant boost in sales. Others provide a more straightforward explanation, citing the Northeast’s abnormally mild January weather.

There is also the labor market. The number of open positions increased in the most recent report, and the unemployment rate is at 3.4%. Wages have also been growing, but inflation is slower. Due to the inflation experienced in 2022, Social Security recipients received an increase in their monthly benefits of 8.7% in January. Nevertheless, there have been more layoff announcements as major tech companies like Microsoft, Google, and Amazon have announced plans to eliminate tens of thousands of employees from their payrolls. Nevertheless, it still needs to be reflected in the unemployment numbers. Given that many people are receiving generous severance payouts and a tight job market, that may still need to occur.

Eric Souza, executive portfolio manager at Silicon Valley Bank, claims that they are working at a different place every time he talks to his pals in the technology industry. Souza claims that in the Bay Area, the epicenter of the tech industry, “consumers haven’t cut down on spending.” This returns everything to the Fed. The central bank aims to reduce inflation to 2% annually, which, depending on the measure, is still much less than half of the present levels. Up over 70% of the economy is made up of consumers. With so much employment available, consumers could sustain the economy for longer than anticipated. Of all, Fed rate increases have a delayed effect, so in six months, those significant increases in 2022 may sting harder and cause the economy to falter.

Current credit card debt statistics, for instance, do indicate that consumers are feeling the strain. However, many people point out that many Americans pay down their accounts each month. According to Cailin Birch, a global economist at Economist Intelligence Unit, “the still-strong condition of the labor market in January suggests that households and the larger economy are still in pretty robust standing.” Yet the numbers are already showing that household financial stress is growing. “In our opinion, this will lead consumer spending to decelerate markedly during 2023 as interest rates climb further in the next months, hitting a high in May 2023 of 5-5.25%,” Birch continued.

Yet, for now, Americans are taking advantage of the warmer-than-expected economy while it lasts, just as they did with the pleasant weather that welcomed 2023.