Getting There: The Economic Balancing Act Progressed In March
Inflation slowed in March, while real disposable personal income rose and so did real consumer spending, according to government data released Friday morning.
Meanwhile, the U.S. economy grew by 1.1% in 1Q 2023, which is not great but may be enough to keep the economy from falling into a recession while tight monetary policy snuffs out inflation.
Inflation peaked, following a historic post-pandemic surge. At 4.2% for the 12 months through March, inflation is doing what the Federal Reserve Board wants.
One year ago, the 12-month rate of inflation peaked at 7% and central bank policymakers realized they had waited too long to quell inflation. It was one of a number of challenges dogging the economy in recent years.
The inflation burst was caused by pandemic-related supply chain problems and an energy price spike set off by Russia’s aggression against Ukraine, which threatens the American imposed system in place since World War II for maintaining geopolitical order worldwide.
Inflation destroys consumer buying power and the U.S. is a consumer driven economy.
The gray dotted lines in the chart above illustrate the range of inflation forecasts by the Federal Reserve Open Market Committee members. The red line represents the personal consumption expenditures deflator (PCED), which is the measure of inflation the Fed uses in its policy pronouncements. The dotted red line is the “core” PCED, which excludes energy and food expenses as they can distort monthly household expenses because they are highly volatile.
In addition to the good news on inflation, Friday morning’s reports on disposable personal income (DPI), consumer spending and the savings rate was also positive.
DPI was up 8.3% compared to the end of March in 2022 and consumer outlays in the same period were up 6.9%. Even after the inflation rate of 4.2%, real consumer income and spending were up, and consumers account for 70% of economic activity in the U.S. The savings rate also made some progress back toward its historical trend rate of about 6.5%.
Earlier this week, the latest estimate of the size of the U.S. economy — gross domestic product — showed modest growth. At 1.06%, growth is slow relative to pre-pandemic. However, when you break down the growth components, the sharp decline in investments is actually good news. The decline reflects a drawndown on inventories. With inventories low, manufacturers are likely to experience a bust of new business in the second quarter.
Moreover, with inflation declining and the economy continuing to grow modestly, the nine rate hikes by the Fed since March 2022 are working and the economy may muddle through without a recession.
The Standard & Poor’s 500 stock index closed Friday at 4,169.48, up +0.83% from Thursday, and up +0.87% from a week ago. The index is up +86.35% from the March 23, 2020 bear market low and down -13.07% from its January 3, 2022 all-time high.
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