January 2024 Economic Outlook
As of November 2023, the Consumer Price Index for All Urban Consumers fell to 3.1%, compared to 7.1% in November of 2022. Notably, this decrease is not solely attributable to a reduction in energy prices, which we know can be highly volatile. Inflation on all items excluding food and energy decreased from 6% in November 2022 to 4% this year. Leading us to conclude that the economy is stabilizing after the shocks introduced in 2020. Egg prices are a good illustration, going from a staggering 49.1% inflation rate last year to 22.3% this year. Looks like someone told them they were cracking up too much!
The tighter monetary policy is proving effective, albeit with a lag. However, discussing the future of the economy, it is premature to anticipate immediate interest rate decreases and, consequently, a significant boost in economic activity and cheaper credit. The Federal Reserve has a dual mandate: to keep inflation and unemployment in check. Inflation is still far from the targeted 2% -- a magic number for maintaining growth, price stability, and moderately high interest rates. The latter ensures that the most powerful monetary policy tool -- ability to change the rates when needed -- remains available. After all, it is hard to reduce rates in case of a recession if they are already at a zero. A push for a decrease in interest rates, while inflation remains elevated, may arise from deterioration in the labor markets. But currently, this is not the case. The recent Bureau of Labor Statistics release places the unemployment rate at 3.7%, the same as in November 2022, indicating that the labor market is still tight. However, the labor force participation rate has increased from 61.9% in November 2022 to 62.8% in November 2023, aligning with our predictions in previous articles.
Despite the unemployment rate remaining unchanged as a percentage, the number of unemployed persons has actually increased from 6 million to 6.3 million. This suggests a growing pool of potential hires, and this number is expected to continue growing. (1)
At the latest Federal Open Market Committee (FOMC) meeting, the Committee decided to maintain the rate at 5-1/4 to 5-1/2 percent. (2) Considering this as the risk-free rate in the economy, all other rates—ranging from mortgages to lines of credit—will be even higher. This aligns with the current scenario of elevated inflation and a tight labor market. The FOMC rate projections position the median fed funds rate at 4.6% by the end of 2024. If all unfolds as anticipated, the rates will embark on a downward trajectory; however, this expectation hinges on the absence of unforeseen shocks (which, by nature, are unpredictable) and the implementation of counterproductive policies. One such policy, for instance, is the inflation relief checks policy, akin to attempting to douse a fire with gasoline. Another policy is that of minimum wage increases which are notorious for causing job losses among those they aim to assist. Minimum wage policies also result in an inflationary push. A recent case in point is California's adoption of a minimum wage increase for fast-food workers to $20, which has reportedly already led to layoffs of low-skilled workers at Pizza Hut. Both McDonald’s and Chipotle have declared intentions to hike menu prices (worth noting that inflation for food away from home is already at 5.3%). (3)
Having said that, the chance of an increase in rates is very low at this point. It appears that the economy is stabilizing, and monetary tightening is gradually making its way through. There is always a risk that, due to the lag in results, the economy can be pushed into a recession. Nevertheless, the chances for further rate increases, although non-zero, are not very high.
In summary, the next steps in conducting any business always depend on the broader economic conditions. Whether it is taking a loan, buying a building, or hiring a new employee. With everything stated above, taking a loan or a mortgage will be relatively expensive for a bit longer. However, hiring should become easier since more people are returning to the labor force.
Thank You!
Rita George
Managing Partner
Clement George
Managing Partner
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