In this report, we take a holistic view at how the current macro backdrop looks, and overall economic commentary as we head into 2024.
GDP
Real GDP of the US continues to surprise market participants to the upside with stronger than anticipated growth for how high interest rates currently are. In the recent Q4 2023 GDP release, we saw a 3.3% growth rate at a time where many expected the economy to be in recession.
Within the composition of GDP, consumption continues to be the strongest driver of positive GDP growth and emphasizes how strong household balance sheets remain at a time of higher inflation and higher interest rates.
Much has been talked about recently around the size of government expenditure and the deficits the US government is currently running. Indeed, when we look at solely government expenditure in GDP, we see that the quarterly % change has been consistently high vs recent years.
With higher deficits as a % of GDP forecasted to continue, we see no reason for this trend to stop.
Looking ahead at the Atlanta Fed’s GDP now tracker, growth expectations are continuing to surprise to the upside:
At a time where many were forecasting a recession, there’s been a consistent cycle where when the Atlanta Fed releases their GDP forecast, many are in disbelief of it and expect it to be revised much lower. However, they have been consistently right on this.
Therefore, we see no signs of a recession when looking at broad economic growth of the US.
Employment
Simply put, the jobs market continues to blow away expectations of the market when looking at the headline numbers. 5 out of the last 6 jobs reports were much higher than market expectations:
These stronger than expected jobs reports cannot be understated. These are very low probability outcomes as seen in this distribution from Bloomberg:
Now, these numbers do look good on the surface. That said, there are issues underneath the surface:
- The vast majority of the new jobs being added are part time jobs, not full time
- When looking at this chart from zerohedge, we see a widening gap between payrolls and employment underneath the surface:
- Finally, with the average # of hours being worked dropping in this recent report, that also artificially increase the jobs report number a bit.
Overall, the jobs market is strong and the Fed has managed to tame inflation without breaking the employment market, which keeps its dual mandate in check.
CPI
Finally, we have the other side of the Fed’s dual mandate: stable prices. Though many in markets use CPI as a gauge of prices, the Fed primarily looks at core-PCE and inflation expectations. Looking at core PCE on an annualized basis, the number is now within striking distance of its 2% target, and within a range that historically positioned the Fed has leaning dovish in the last 20 years
In the recent Fed meeting, Powell mentioned that they are not necessarily looking for “better” data on inflation, but rather just more of the same good data that we already have. Therefore, the function for knowing when rates will begin to decrease is more time related than value related.
Finally, looking at the 10yr breakeven rate as a short-hand for long term inflation expectations, they are now well-anchored and within an acceptable range for the fed to begin to ease from a restrictive level as they define it:
Overall, this report paints a picture of a goldilocks economy, arguably a soft landing, where the economy remains resilient, the jobs market is strong, and inflation is within a manageable range. Now, all the Fed is looking for before beginning to ease is a continuation of this goldilocks environment. Furthermore, there is very little in the data that is supporting the idea of a looming recession anytime soon.
Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
