Last week we received a number of important economic data points, with the PCE (a measure of inflation) being perhaps the most important. In their final meeting of 2023, Fed Chairman Powell indicated they want to see a sustained downward trend in inflation, and last week’s PCE data was encouraging.
As the chart indicates, the monthly headline PCE rate turned negative for the first time since 2020 at -0.1%, and the annual rate was 2.64%. If we project out the last 6 months, then we would expect the headline PCE to be right at 2% (the Fed’s target rate) in 12 months. As we noted in our previous post, the Fed’s median expectation is for headline PCE to be 2.4% in 12 months.
Considering we began the year with headline PCE around 5%, we have certainly made progress. However, much of that progress has come through declines in the volatile food and energy markets. When we look at Core PCE, we see a monthly rate of 0.1% and an annual rate of 3.15%.
Inflation Components
When we look at the components of inflation, we see that services continue to run above the Fed’s 2% target while the declines in PCE have occurred on the goods side of the economy.
We also got encouraging news on the income front, with personal and real disposable income showing monthly increases.
Personal Spending
The gains in real income were also matched with a pickup in personal spending.
Please recall that for us to have a true soft landing, we believe that declines in inflation must also be matched with gains in real income, and we are seeing this develop. Therefore, the odds of a soft landing are increasing and the odds of recession next year are decreasing.
Earlier in the year we heard the term “rolling recession” to describe how services were running strong while goods weakened. It seems likely that we will see this term used again. Ideally, we would like to see both goods and services show growth with lower overall inflation, and we might see that develop as the disinflation and deflation in goods makes that part of the economy more attractive vs. services. But in 2024 it is also likely that as the economy finds its footing we will see various areas of volatility.
Housing Market
Last week we also received housing data and it was mixed.
We begin with the Existing Homes report in which unit sales increased slightly for the month, but remained near 12-month lows.
The median price also declined, but the month’s existing home supply declined slightly to a still tight 3.5 months. However, with the general expectation that the Fed will begin to lower rates in 2024, mortgage rates have also come down, making homes more affordable.
New home sales declined sharply month-over-month, with the rate of new homes sold reaching a new 12-month low.
The median price increased to the 12-month average, but with the declines, the months supply of new homes reached a new 12-month high of 9.2 months.
However, housing starts also increased last month.
With the general declines in mortgage rates, we would expect housing to pick up as affordability increases.
Durable Goods
Finally, we saw a general uptick in durable goods.
However, when we take out the volatile transportation sector, we see the growth is more muted, but still positive.
Looking Ahead
With the lockdowns in 2020 and 2021, we saw an emphasis on goods as we all stayed at home and could not go places. In 2022 and 2023, we generally saw the stimulus money and opening up of our society move from goods to services. It would not be surprising for 2024 and 2025 to be years where things more normalize, unless we have more geopolitical shocks. However, it will likely take a few months for the Fed to be convinced of the sustainability of the downward trend in inflation, so we can expect a rocky start to 2024.
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