WASHINGTON, April 1 (Reuters) – Fears that the war in Ukraine could tip the US economy towards 1970s-style stagflation have given way to signs Americans are planning to travel further, at restaurants to return and continue a stable, albeit incomplete development back to normal.”
There are still major gaps in the post-pandemic economy. Downtown office buildings are still underutilized, which may be one of the most enduring changes as workers and employers realized many jobs could be done from home; Businesses are still struggling to find supplies and hire workers at a time of record job vacancies.
But after a winter of war, a new wave of coronavirus and already high inflation painted a potentially bleak picture of even faster rising prices and slowing growth, the latest government and high-frequency data show an expansion that appears poised to continue.
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According to economists polled by Reuters, the monthly nonfarm payrolls report, due to be released on Friday, is expected to show an increase of nearly 500,000 jobs in March and a further decline in the jobless rate to 3.7%. High-frequency data from payroll providers such as UKG and Homebase showed hiring momentum continued through the end of the month and likely into April.
Gasoline mileage fell in March when prices were above $4 a gallon nationwide, but Energy Information Administration data still shows gas mileage at about 95% of pre-pandemic levels, about what since early 2022.
Air travel is approaching 90% of pre-pandemic levels. Data from restaurant reservation site OpenTable shows that 15 of the last 18 days ended March 30.
Inflation, which is three times the Federal Reserve’s 2% target, could mean consumers are getting less for their money. Spending data for February showed that inflation-adjusted consumption actually fell, with energy consuming a larger chunk of household budgets. Continue reading
That drop, however, came after a spending spurt in January, and Fed analysts and policymakers agreed this week that neither global events nor the ongoing pandemic have put a major damper on the US economy.
“So far, high gasoline prices have not led to demand destruction,” analysts at RBC Capital Markets wrote this week. Between soaring wages and savings still flowing from pandemic relief payments for many households, “the average American has never been financially able to absorb $4 worth of gasoline like we do today.” The outbreak of war in Eastern Europe threatened further fan inflation, which is currently at a four-decade high. The prospect of a more aggressive Fed response to inflation fueled talk of a “hard landing” – a recession triggered by rising interest rates, tighter credit and a subsequent contraction in corporate and household spending.
A closely watched segment of the bond market remained concerned about the outcome this week, as 10-year Treasury bond yields briefly dipped below 2-year Treasury bond yields – a sign of flagging confidence in future economic growth.
However, what economists and Fed officials see as more meaningful signals from the bond market remained healthy.
“It’s premature to start the countdown to recession,” wrote Jefferies analysts Aneta Markowska and Thomas Simons. “This doesn’t look like a late-cycle economy… It’s a mid-cycle economy and the business cycle has room to run.”
BACK TO NORMALITY
Far from slowing down the economy, the Fed’s policy rate remains well below levels that would discourage spending or investment. The US Federal Reserve increased its federal funds rate by a quarter of a percentage point on March 16, raising it from near-zero levels set in March 2020 to offset the economic impact of the pandemic.
Interest rates are expected to rise steadily from here, with Fed officials forecasting a hike of at least a quarter of a point at each of its six remaining policy meetings this year — with the potential for even larger hikes by the end of the year year could remove any remaining Fed support for economic growth.
Fed policymakers said this week they will be watching closely how these expected rate hikes affect inflation and economic growth, and stand ready to either increase borrowing costs more quickly if prices don’t respond, or suspend them if they do this is appropriate.
However, they stressed that the economy appears resilient at this time as companies may struggle to find labor and supplies, but also meet record demand, post strong profits and raise wages.
By some measures, the return to normal is here. Oxford Economics recently “pulled out” its weekly economic recovery tracker because the data it indexes, which measures employment, financial conditions, mobility and other issues, were “essentially back to pre-pandemic levels,” wrote Oxford analyst Oren Klachkin.
There are also signs that major changes expected by economists as part of a “normalizing” economy are beginning to take shape.
Services spending surged in February while goods fell, a rotation that Fed officials have been expecting and which could help in the fight against inflation. Consumers bought record quantities of goods during the pandemic, when opportunities to spend on services were constrained by social distancing rules and measures that forced many businesses to close. High demand for cars, bicycles, appliances, and other goods met with an outstripping global supply system, leading to soaring prices.
Foot traffic data from cellphone-tracking company Unacast showed that visits to home goods, electronics and car dealerships dropped significantly in 2022 from a year earlier, while the hotel sector rebounded quickly.
Data from the Las Vegas Convention and Visitors Authority showed a sharp 18% difference in overall attendance in the popular events and convention city in February. Still, demand has been strong enough to increase average daily room rates by 15%, and total revenue per available room is less than 10% below 2019.
There are even some tentative signs that inflation is moving in the right direction.
Data for February showed prices continued to rise year-on-year, but a key measure of monthly inflation fell a tenth of a percentage point.
A month does not make a trend, but at a press conference after the end of the May 15-16 monetary policy meeting. On March 30, Fed Chair Jerome Powell said that some kind of month-on-month decline “is really what we’re looking for.”
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Reporting by Howard Schneider; Adaptation by Dan Burns and Paul Simao
Our standards: The Thomson Reuters Trust Policy.