The median projection for real GDP growth stands at just +0.5% this year & next, prompting a question during Powell’s presentation about the prospect of stagflation.
- Consumer spending growth has slowed from last year’s rapid pace, in part reflecting lower real disposable income & tighter financial conditions.
- Activity in the housing sector has weakened significantly, largely reflecting higher mortgage rates.
- Higher interest rates and slower output growth also appear to be weighing on business fixed investment.
- A tripling of the 2024 real GDP growth forecast with a simultaneous increase in unemployment suggests expectations for a huge increase in productivity (fewer people with greater output).
- 3 buckets of PCE inflation: goods inflation; housing services; and the largest component (55% of the total) which is non-housing related core services.
- As it relates to goods inflation, the Fed has been expecting for the last 1.5 years that supply chain improvements and lower demand would lower goods inflation (a development that has just started to manifest).
- Housing services inflation has been very high & is expected to continue escalating as rental leases expire and are renewed in a market that remains hot. However, the rate of increase for new leases will moderate as the industry works through its backlog over the next year.
- The largest piece of the PCE index is non-housing related core services which is primarily a function of the labor market. To date, the Fed has not observed much softening in a very tight labor market marked by job growth & high wages (more on this in the next post). Based upon expectations that services inflation will not move down quickly, the Fed recognizes its need to raise rates even higher.
- Finally, the Fed does not expect that a loosening of covid restrictions in China will have a material impact on our economy. Notably, while weaker output in China pushes down commodity prices, supply chain disruptions can push up inflation in the West.