Wall Street continues to misunderstand the economy
The American economy grew at a challenging pace last year.
Forecasting an impending recession The Fed has raised interest rates seven times so far and has signaled more rate increases. Bond yields have reversed, leading indicator indexes have worsened for the ninth consecutive month, and the moonshot pandemic growth rate in the money supply has declined. reversedBoth bond prices and stock prices experienced a rare and painful simultaneous collapse.
The excess household savings accumulated during the pandemic was thought to be close to depletion. Bank lending standards were becoming stricter.a wall street journal According to research More than two-thirds of economists at major financial institutions predicted a recession.. Goldman Sachs was the most optimistic about growth this year, expecting gross domestic product to rise 1%.
The Fed itself had predicted a recession. A summary of economic forecasts released in December 2022 showed that the median growth forecast for 2023 had fallen from 1.2% to 0.5%. When the Fed had the chance to revise its view in March, it had forecast even lower growth of 1.4%.
The Commerce Department's Bureau of Economic Analysis announced Thursday that gross domestic product (GDP) increased 3.1% from the fourth quarter of 2022 to the fourth quarter of last year.of Q3 pace is 3.3% It continued to grow at 4.9% in the third quarter, far better than Wall Street's 2% expectations.
Where did growth come from?
The biggest factor behind the upside surprise in the fourth quarter was household expenditure. Throughout the year, consumer spending has defied expectations of weakness, and the last three months of the year were no exception. Household expenditure increased by 2.8%, contributing 1.9 percentage points to GDP.it is Almost 60% of growth rate.
The source of strong household spending is not entirely a mystery. The labor market remains very strong, with unemployment at its lowest level in decades and employment strong. The labor market remains tight by historical standards, even though hiring is slowing, job turnover is flat, and the number of job openings is falling. When households have confidence in their jobs, they have more freedom to spend.
Another source of growth last year was government spending. Strong government hiring helped maintain payroll numbers and directly supplied to household consumption. As Joe LaVogna of SMBC Nikko Securities has shown, 3.3 trillion dollars, the largest ever Cumulative excess (defined as above pre-pandemic trends) federal spending since Biden was sworn into office. Government spending grew at an annualized rate of 3.3% in the third quarter, faster than expected. Federal government non-defense spending increased by 4.6%.
President Joe Biden speaks about “Bidenomics” in Milwaukee, Wisconsin on August 15, 2023. (Scott Olson/Getty Images)
The overall impact of the Biden administration's policies was even greater. inflation control law And that chips method likely contributed to a significant portion of the growth of investment in structureswhich expanded at a pace of 3.2 percent in the fourth quarter and at a pace of 11.2 percent in the previous quarter.
This means: Private sector may be weaker than key GDP statistics suggest. However, it is not as simple as subtracting growth from government spending from GDP, because government spending and subsidies crowd out private investment. Some of the growth spurred by governments over the past year may have been driven by private sector spending and investment in leaner regimes.
Year of making dangerous predictions
We were on the wrong side of recession predictions early on., pointed out in early January 2023 that forecasters were wrong about everything the previous year.The consensus view appears to be based on a flawed and outdated view of the economy, primarily Ignoring the strength of the labor market and household spending.
“Last year started with the consensus on markets, economic growth and inflation wrong on every important aspect. It's worth considering that this year's consensus may not be any better.” wrote.
By early February, we were writing that the economy showed no signs of slipping into recession in 2023. “Retail sales, industrial production and homebuilder confidence scream 'no-landing' march,” he wrote. In March, we noticed revised information from the Fed showing: money supply was increasing Longer than preliminary data indicated, it is likely that growth will last longer.
As we predicted, inflation remains a serious problem. Despite many declarations that inflation has been defeated, the latest consumer price index (CPI) rose 3.4% year-on-year, while the core CPI rose 3.9%. The median CPI, the gold standard for underlying inflation, rose 5.1% through November (the latest figures available).
The consensus now is that the economy will slow significantly this year and that the Fed will cut rates five to six times. we are still on the other side, dangerous predictions Growth faster than market expectations, fewer cuts, and higher inflation.
