Each week brings head-scratching contradictory news about the economy. This past week was no different, with a batch of economic reports showing that — despite the recession talk — the US economy shows remarkable resilience.
Yes, the economy is strong. But it comes with a lot of caveats.
- November’s jobs report defied analysts’ expectations, adding 263,000 new roles and keeping America’s jobless rate at 3.7%, almost a half-century low.
- The Federal Reserve’s favorite inflation gauge, the PCE Price Index, finally showed signs of cooling.
- Gross domestic product grew at a 2.9% annualized rate last quarter, a sharp bounce back from shrinking in the first half of the year.
However, these are just ingredients in a murky soup of conflicting “yes, but” headlines.
Yes, consumers say they feel lousy about the economy. But a record 196 million Americans went shopping over the Thanksgiving weekend — and those roaring sales numbers weren’t just because inflation has pushed prices higher, but also because people were making more transactions, according to Adobe Analytics.
Curtis Dubay, chief economist at the US Chamber of Commerce calls this “second-hand pessimism” and says the economy might not be doing as poorly as you think.
Yes, inflation at near 40-year highs is biting into family budgets. But Americans are booking air travel and heading to Disney parks in near-record numbers, even with higher park prices.
Yes, economists are worried about a recession, but the job market is incredibly tight with more than 10 million open jobs and 1.7 jobs available for anyone who’s searching for one (or looking to job hop).
“The labor market is incredibly strong again,” Federal Reserve Chairman Jerome Powell in a speech Wednesday. “It’s too great, in a way, because it’s going to be adding to inflation.”
So what’s next?
The truth is that no one knows what happens next. Forecasts have been notoriously unreliable in the post-Covid economy. (Remember “transitory” inflation?”)
The Fed has been trying to contain the highest inflation since the 1980s, jacking up interest rates six times this year and even rolling out a bumper three-quarter-point hike not once but four times in a row.
That means the next year will no question be a challenge as all that tightening continues to work its way through the economy.
But household finances are in better shape to handle it, with an excess $1.7 trillion in savings as a cushion — although people will likely have to dip into more of their savings.
And while the housing market may be cooling, it’s not crashing. After a very strong 2021, the sector is “readjusting, recalibrating,” Bess Freedman, CEO of Brown Harris Stevens, said on CNN’s “Early Start.”
Covid broke the economy and putting it back together has been hard to measure. Tens of millions of jobs were lost overnight. Schools closed, factories shuttered, more than a million lives lost. More than two years later, we’re still struggling to gauge the strength and durability of the recovery.
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Given high inflation, slowdown in Canada’s economy is ‘a good thing,’ Tiff Macklem says
Bank of Canada governor Tiff Macklem says that although a slowing economy may not seem like a good thing, it is when the economy is overheated.
Speaking in Quebec City on Tuesday, Macklem said that higher interest rates are working to cool the economy as elevated borrowing costs are constraining spending on big-ticket items such as vehicles, furniture and appliances.
As demand for goods and services falls, Macklem says the economy will continue to slow.
“That doesn’t sound like a good thing, but when the economy is overheated, it is,” he said.
In addition to global events, the overheated domestic economy pushed up prices rapidly, he said.
To slow the economy domestically, the Bank of Canada has embarked on one of the fastest monetary policy tightening cycles in its history. It has hiked its key interest rate eight consecutive times since March, bringing it from near-zero to 4.5 per cent.
However, last month, the Bank of Canada said it will take a “conditional” pause to assess the effects of higher interest rates on the economy.
“Typically, we don’t see the full effects of changes in our overnight rate for 18 to 24 months,” Macklem said on Tuesday.
“In other words, we shouldn’t keep raising rates until inflation is back to two per cent.”
However, the governor said the Bank of Canada will be ready to raise rates further if inflation proves to be more stubborn than expected.
As gas prices have fallen and supply chains have improved, inflation in Canada has slowed since peaking at 8.1 per cent in the summer. Macklem called this a “welcome development,” but stressed inflation is still too high.
“If new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further,” Macklem said.
For inflation to get back to two per cent, Macklem said wage growth will have to slow, along with other prices.
Wage gains lagging inflation
Wages have been growing rapidly for months but continue to lag the rate of inflation. In December, wages were up 5.1 per cent.
Though annual inflation is still at decades-high levels, economists have been encouraged by a more noticeable slowdown in price growth over recent months.
The Bank of Canada forecasts the annual inflation rate will fall to three per cent by mid-year and to two per cent in 2024.
Royce Mendes, an economist with Desjardins, said that Macklem is crossing his fingers that the rate hikes he has implemented so far will be enough to get it done.
“The head of the Bank of Canada seems quite comfortable sitting on the sidelines even as his U.S. counterpart will be discussing the need for further monetary tightening south of the border,” Mendes said.
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