By Zack Fritz, Sage Policy Group
The first four months of 2024 were defined by hotter-than-expected inflation and faster-than-expected economic growth. Price increases reaccelerated, employers kept adding jobs at a rapid pace, and consumers continued to spend.
This upended economic forecasts and by the middle of the second quarter, the consensus outlook had changed from three expected rate cuts this year to one or perhaps two, with those cuts unlikely to occur until the end of the year at the very earliest.
The release of May’s economic data changed the dynamics again. Consumer prices were virtually flat, marking the slowest monthly inflation since July 2022. Core prices increased just 3.4% between May 2023 and May 2024, the slowest year-over-year core inflation increase since April 2021. Other measures of inflation, like the Producer Price Index and the Import and Export Price Indexes, also showed a sharp deacceleration in May.
While inflation slowed in May, so did the demand side of the economy. The unemployment rate inched up to 4.0%. Still extremely low by historical standards, but the highest rate since January 2022. Retail spending increased just 0.1% for the month and is up just 2.3% year over year, and that’s in nominal terms. After accounting for inflation, retail spending is down on a year-over-year basis.
Some of this slowdown is directly attributable to the impact of higher interest rates. The housing market remains in a state of virtual paralysis as buyers continue to wait for mortgage rates to fall below the high-6%/low-7% range. As a result, adjacent industries have also seen dramatic declines in business. For instance, spending at furniture stores has fallen roughly 7% over the past twelve months.
And yet, there are still some signs of strength in the economy. It’s been a record Summer for traveling; TSA recently set the all-time record for most passengers screened in a single week. Employers continue to add jobs at a healthy pace, with more than 1.2 million jobs added over the first five months of 2024.
Which is to say, the economy is currently sending mixed signals. The unemployment rate increased, but so did employment levels. Retail spending has slowed, yet Americans are traveling at a record pace. It’s too soon to know if these indications of weakness are a statistical blip or the beginning of a real trend which poses an obvious conundrum for the Federal Reserve as they try to determine when to initiate interest rate cuts.
Despite this uncertainty, the upshot is that the risks facing the economy appear to be changing from reaccelerating inflation and higher-for-longer rates to rising unemployment and weaker demand. Interest rate cuts are still unlikely at the Federal Reserve’s next meeting at the end of July. However, if the economic trends continue, and inflation remains flat or decelerates, it appears increasingly likely that rate cuts could begin at the Federal Reserve’s September meeting.
