As 2024 unfolds, the global economy is embracing a wave of optimism, marked by diminishing inflation and resilient growth that has surpassed expectations. Among developed nations, the United States is particularly noteworthy for its economic vigor.
According to a report by Jeanna Smialek, Ana Swanson, Alan Rappeport and Jim Tankersley for The New York Times (NYT), which was published on February 2, following a tumultuous period of soaring prices in 2021 and 2022, driven by pandemic-induced supply chain disruptions and exacerbated by geopolitical tensions, notably the Russia-Ukraine conflict, nations worldwide are witnessing a retreat in inflation. This decline has been achieved without the anticipated recessions despite central banks’ aggressive interest rate hikes aimed at tempering inflation.
The NYT article says that the International Monetary Fund (IMF) and the Federal Reserve have expressed astonishment at the U.S. economy’s strength, contrasting with the more modest growth observed in the United Kingdom and Germany. Apparently, the IMF recently adjusted its growth projection for the U.S. to 2.1 percent from an earlier estimate of 1.5 percent, signaling a significant uptick. Meanwhile, other major economies like the euro area and Japan are expected to see growth rates of 0.9 percent, with the U.K. slightly behind at 0.6 percent.
Last week, at the post-FOMC press conference, Federal Reserve Chair Jerome H. Powell, reflected on the economic landscape, describing it as “a good situation” and “a good economy,” a sentiment he reiterated nearly 20 times during that event.
This optimistic outlook was further bolstered by a January jobs report, revealing an addition of 353,000 jobs and a notable increase in wage growth, underscoring the U.S. economy’s robustness.
On February 2, the Council of Economic Advisers (CEA) reported on the latest U.S. employment report in a thread posted on social media platform X.
The CEA highlighted that the average job growth over the past three months has been 289,000. They also mentioned that job growth figures for November and December were revised upwards by a total of 126,000 jobs. Additionally, the CEA pointed out that annual benchmark revisions have adjusted payroll employment in March 2023 down by 266,000, which was less than preliminary estimates had suggested.
According to the CEA, the unemployment rate in the U.S. remained steady at 3.7% in January, continuing a 24-month streak of being below 4%, a record not seen in over fifty years. They also noted that the broader measure of underemployment increased slightly to 7.2%, with both rates staying around these low levels since March 2022. The CEA’s analysis showed that labor force participation stayed constant at 62.5% in January, while participation among prime-age workers (25-54 years old) slightly increased to 83.3%. The employment-to-population ratio for this demographic also saw a minor increase of 0.2 percentage points.
The CEA reported on wage growth, stating that average hourly earnings grew by 0.6% in January, up from December’s 0.4%, with annual wage growth accelerating to 4.5%. They observed that some of January’s wage growth could be attributed to compositional changes in hours worked, likely influenced by the month’s weather conditions. Without these changes, wage growth in January would have been approximately 0.1 percentage points lower. The CEA also highlighted that the three-month growth rate in average hourly earnings was the fastest since May 2022, annualized at 5.4%.
Furthermore, the CEA noted an increase in remote work, with 22.9% of employed adults teleworking in January, up from 19.4% the previous year. This rate is significantly higher than the approximately 10% observed in February 2020. The CEA cautioned against overinterpreting any single monthly report due to their potential volatility and the possibility of substantial revisions to payroll employment estimates. They recommended viewing each report in the context of additional data as it becomes available, emphasizing the importance of a comprehensive approach to analyzing employment trends.
Kristin Forbes, an economist at MIT Sloan School of Management, pointed out that the U.S.’s deficit, as a percentage of its GDP, exceeds that of many other advanced economies, raising concerns about future financial burdens. However, administration officials argue that the economic benefits justify the expenditures.
The NYT report went on to say that the divergence between the U.S. and other economies isn’t solely due to government spending. Policy design differences, particularly in pandemic relief efforts, have also played a role. Unlike European countries that subsidized workers to remain in their jobs, the U.S. opted to support displaced workers directly through one-time checks and expanded unemployment insurance. This approach may have fostered stronger productivity growth by facilitating job market reentry into new and potentially better-suited positions.
The NYT article also mentioned that geopolitical proximity to crises, such as Europe’s greater exposure to the fallout from the Ukraine conflict, has further differentiated economic outcomes. The U.S.’s relative insulation from global energy market volatility has been a boon as European businesses have grappled with significant energy price hikes. Finally, it mentioned that demographics also contribute to the U.S.’s economic dynamism, with a younger population compared to aging societies in the euro area and Japan, fostering a more vibrant economic activity.
In a detailed discussion on CBS’s “60 Minutes” broadcasted recently, Fed Chair Jay Powell offered an in-depth view of his strategy for inflation control, the current state of the economy, and the anticipated path for interest rates. The interview, conducted by Scott Pelley, provided insights into Powell’s efforts to navigate the economy through challenging periods without triggering a recession, in spite of the Federal Reserve’s substantial increases in interest rates.
Powell acknowledged the progress in lowering inflation from its highest points, yet he warned that there is still much work to be done. The Federal Reserve aims to achieve complete price stability, and although inflation has decreased for 11 consecutive months, Powell highlighted the necessity of moving forward with caution before contemplating reductions in interest rates. He advocated for additional proof that inflation is consistently heading towards the Federal Reserve’s goal of 2% before considering any decreases in interest rates.
The Federal Reserve Chair elaborated on the reasoning behind the 2% inflation target, noting its significance in giving the central bank additional flexibility to address economic slowdowns. Powell pointed out that hitting the 2% target is not mandatory for initiating rate cuts, but he underscored the importance of being confident that inflation is declining.
Powell also spoke on the fine line the Federal Reserve must walk between acting prematurely, which could interrupt the progress on controlling inflation, and delaying action, which might result in a recession. He conceded that, looking back, the Federal Reserve might have acted more swiftly to counteract inflation in 2021, yet he justified the policy shifts that have since helped to moderate inflation.
Looking to the future, Powell suggested that a reduction in rates in the immediate future, especially by the March meeting, appears improbable, indicating that the Federal Reserve requires more time to be assured of the inflation trend. Nevertheless, he was hopeful that the circumstances for lowering rates might arise within the year, dependent on ongoing favorable inflation data.
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