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Economy

The US Economy Came In Hot in January — But There Are Some Caveats – BNN Bloomberg

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(Bloomberg) — The US was unseasonably hot in January, and it wasn’t just the weather.

Friday’s data are only the latest indication that the economy got off to a strong start in 2023, underscored by the biggest jump in consumer spending in nearly two years and a reacceleration in closely watched measures of inflation. Sales of new homes also surged, following figures last week that showed strong retail sales.

It’s all underpinned by an exuberant labor market, which shocked even more to the upside with January job growth that topped all estimates and the unemployment rate retreating to a 53-year low. That’s supporting incomes, boosting sentiment and giving Americans the wherewithal to keep spending, therefore keeping inflation elevated and pressuring the Federal Reserve to act more aggressively.

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The question is: How long can that strength last? The answer lies, at least in part, in to what degree that strength was a function of underlying momentum versus one-off factors.

Read more: ‘Too Good to Be True’ Jobs Report Draws Skeptics on Data Quirks

Here are some caveats to keep in mind:

  • Weather: January proved to be an unseasonably warm month. The temperate weather boosted demand for things like restaurants and also drove an increase in hours worked. That likely bolstered the wages and salaries metric as well as overall consumer spending in Friday’s report from the Bureau of Economic Analysis.
  • Shifting shopping patterns: Pandemic-driven supply-chain challenges led to widespread shortages and shipping delays. As a result, many Americans shifted their holiday shopping earlier, a trend that likely contributed to the back-to-back declines in consumer spending and retail sales in the final two months of the year. Gift cards are counted in the spending figures when they’re used, not purchased, which could have boosted January’s figures.
  • Annual cost-of-living-adjustment: Known as the COLA, the annual cost-of-living adjustment for Social Security and Supplemental Security Income boosted incomes in January by the most in four decades. The 8.7% increase in benefits impacted about 70 million Americans.
  • Tax accounting: Friday’s data showed a large decline in personal taxes, providing a lift to disposable personal income. That likely also helped boost the savings rate in the month. Wells Fargo & Co. economists noted the “decline somewhat reflects BEA accounting rather than the true household experience.” Revisions to real disposable income could be coming down the pipeline as a result.
  • In the other direction, a decline in one-time payments issued by states to help offset rising prices and the end of the extended child-tax credit weighed on the overall income figures, offsetting the surge in Social Security incomes.

©2023 Bloomberg L.P.

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Economy

US revises down last quarter's economic growth to 2.6% rate – ABC News

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WASHINGTON — The U.S. economy maintained its resilience from October through December despite rising interest rates, growing at a 2.6% annual pace, the government said Thursday in a slight downgrade from its previous estimate. But consumer spending, which drives most of the economy’s growth, was revised sharply down.

The government had previously estimated that the economy expanded at a 2.7% annual rate last quarter.

The rise in the gross domestic product — the economy’s total output of goods and services — for the October-December quarter was down from the 3.2% growth rate from July through September. For all of 2022, the U.S. economy expanded 2.1%, down significantly from a robust 5.9% in 2021.

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The report suggested that the economy was losing momentum at the end of 2022.

Consumer spending rose at a 1% annual rate last quarter, downgraded from a 1.4% increase in the government’s previous estimate. It was the weakest quarterly gain in consumer spending since COVID-19 slammed the economy in the spring of 2020. Spending on physical goods, like appliances and furniture, which had initially surged as the economy rebounded from the pandemic recession, fell for a fourth straight quarter.

More than half of last quarter’s growth came from businesses restocking their inventories, not an indication of underlying economic strength.

Most economists say they think growth is slowing sharply in the current January-March quarter, in part because the Federal Reserve has steadily raised interest rates in its drive to curb inflation.

The resulting surge in borrowing costs has walloped the housing industry and made it more expensive for consumers and businesses to spend and invest in major purchases. As a consequence, the economy is widely expected to slide into a recession later this year.

The central bank has raised its benchmark interest rate nine times over the past year. The Fed’s policymakers are betting that they can stick a so-called soft landing — slowing growth just enough to tame inflation without tipping the world’s biggest economy into recession.

Yet as higher loan costs spread through the economy, analysts are generally skeptical that the United States can avoid a downturn. The main point of debate is whether a recession will prove mild, with only minor damage to hiring and growth, or severe, with waves of layoffs.

The financial conditions that led to the collapse of Silicon Valley Bank on March 10 and Signature Bank two days later — the second- and third-biggest bank failures in U.S. history — are also expected to slow the economy. Banks are likely to impose stricter conditions on loans, which help fuel economic growth, to conserve cash to meet withdrawals from jittery depositors.

“The economy ended 2022 with marginally less momentum,” Oren Klachkin and Ryan Sweet of Oxford Economics wrote in a research note. ”Looking ahead, the economy will face the full brunt of tighter credit conditions and Fed policy this year, and inflation is set to stay above its historical trend.”

They added: “We expect a recession to hit in the second half of 2023.”

In the meantime, the job market remains robust and has exerted upward pressure on wages, which feed into inflation. The pace of hiring is still healthy, and the unemployment rate is near a half-century low. The confidence and spending of consumers remain relatively solid.

Thursday’s report from the Commerce Department was its third and final estimate of GDP for the fourth quarter of 2022. On April 27, the department will issue its initial estimate of growth in the current first quarter. Forecasters surveyed by the data firm FactSet have estimated that growth in the January-March quarter is decelerating to a 1.4% annual rate.

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Economy

Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 – Bloomberg

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Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023  Bloomberg

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Anomalies abound in today's economy. Can artificial intelligence know what's going on? – The Globe and Mail

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All the fuss today is about machine learning and ChatGPT. The algorithms associated with them work well if the future is similar to the past. But what if we are at an inflection point in economic and political conditions and the future is different from the past? Will record profit margins, inflated asset prices and low inflation and interest rates of the past 30 years be an accurate reflection of the future? Is this time different?

Maybe we’re already there. Things do not seem to make sense anymore. Have you noticed that economic indicators seem to have stopped working as well and as predictably as they have in the past?

Here are some examples of the puzzling behaviour of economic statistics of recent months.

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An inverted yield curve has historically been a good indicator of recessions. For several months now the yield curve has been inverted and yet the U.S. economy has been adding millions of jobs, leading to an historic low unemployment rate. Employment is booming while the economy at large is not.

Consumer sentiment, as reflected in the University of Michigan surveys, and consumer spending have tended historically to move together. But this time around, while consumer sentiment took a nosedive, consumer spending and credit card balances keep growing, reaching record highs.

Construction employment and homebuilder stocks are rising while housing permits and housing starts are falling. Normally, homebuilder stock prices would reflect the collective wisdom of financial markets about housing activity. Not this time.

Bond markets are expecting inflation to recede to the Fed’s target rate of 2 per cent. In this case, the real interest rate, implicit in the 10-year treasuries yield of between 3.5-4 per cent, is 1.5-2 per cent, which is close to historical averages. But prior to the Silicon Valley Bank debacle, some surveys pegged expected inflation to about 3 per cent going forward. Assuming the real rate is the same, this implied a 10-year treasuries yield of between 4.5-5 per cent. Either the bond market was out of line or forecasters’ inflation models do not work as well as in the past.

And oil prices are around US$70 a barrel despite the recent banking crisis and at a time when the economy is slowing down and believed to be entering a recession. Based on past experience at this point in the business cycle oil prices should be at US$50 or less. But they are not. Which begs the question: What will happen to oil prices when the economy enters a growth phase, especially with the opening of China after the COVID-19 lockups?

And the list of puzzling contradictions goes on. Having said that, someone may argue that the labour statistics, for example, are a lagging indicator and show where the economy was, not where it is going. While this is true, the magnitude of divergence between labour statistics and economic activity is so much higher than they’ve been historically. That makes one wonder what is going on.

It could be that many of these puzzling statistics are the result of “survey fatigue,” as Bloomberg Businessweek calls it. The publication reports that there has been a decline in response rates for many surveys government agencies use to collect economic data.

For example, employer response to the Current Employment Statistics survey, according to the publication, which collects payroll and wage data each month, has declined to under 45 per cent by September, 2022, from about 60 per cent at the end of 2019. The issue here is the non-response bias: that people who are not responding to the survey are systematically different from those who do, and this skews results. Could weakening trust in institutions and governments be behind the decline in response rates in recent years? If this is the case, the problem is serious and difficult to reverse or eliminate.

As a result, machine learning algorithms that need massive and good quality data about the past and assume that the future will look pretty much like the past may not work. Then what? Should we re-examine our old models? Or will human intervention always be required? Machine learning will not be able to replace investor insight and “between the lines” reading of nuanced economic numbers.

George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Ivey Business School, University of Western Ontario.

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