Consumer confidence and resilient spending are being supported by a still strong labor market and inflation that continues to fall.

Highlights for this week include:

  • Consumer spending continues to propel better-than-expected economic growth while improving consumer confidence suggests healthy future spending. Consumer confidence and resilient spending are being supported by a still strong labor market and inflation that continues to fall.
  • Economic growth drives higher corporate profits and provides the ultimate support for stocks. Major stock indexes, led by the S&P 500, reached new all-time highs in January. While market leadership remains narrowly focused on technology-related sectors, positive economic readings with falling inflation continue to support an optimistic outlook.

A Resilient, More Confident Consumer Continues to Support Economic Growth

Consumer spending remains resilient despite the headwinds of higher interest rates, tighter lending standards, and the resumption of student loan payments. Personal consumption expenditures (PCE) continued to increase at a solid pace, up 0.7% m/m in December, above the prior month’s gain of 0.4%.

Strong consumer spending also propelled better-than-expected fourth quarter (4Q) economic growth which increased at a 3.3% annualized rate, far above the consensus estimate of 2.0%. While the increase was led by consumer spending, all other major GDP components made positive contributions. Consumer spending rose at a 2.8% annualized rate in 4Q, with both goods and services spending increasing. With the labor market still strong and consumer sentiment rising, the momentum in consumer spending should carry into 2024.

Consumer confidence is improving with a still healthy labor market and falling inflation, which should support future spending. The Conference Board’s Consumer Confidence Index rose for the third straight month in January to the highest level since December 2021. The index level is historically consistent with continued economic expansion with consumers’ expectations for a recession continuing to decline.

The present situation measure of consumer confidence observed its largest monthly increase in nearly three years, hitting a level not seen since March 2020. Both current business conditions and job availability improved. Consumer expectations also rose, reaching their highest level since July.

The healthy labor market continues to support the consumer, with job openings edging up 1.1% in December to 9.026 million. Job openings remain higher than pre-pandemic, as labor demand remains solid. Additionally, job openings continue to exceed the number of unemployed.

Inflation Continues to Fall

The Federal Reserve closely watches the PCE Price Index and the Employment Cost Index as inflation indicators. Both continue to signal falling inflation. The PCE Price Index continues to make progress toward the Fed’s 2.0% inflation target with core PCE inflation (excludes volatile food and energy) falling to 2.9% y/y, the lowest level since March 2021. All core components in Fed Chairman Powell’s preferred breakdown of inflation eased. Core goods prices fell 0.1% from a year ago, hitting negative territory for the first time in more than three years. Housing and super-core (services ex-energy and housing) inflation came down to 6.4% and 3.3%, respectively.

The Employment Cost Index (ECI) increased 0.9% in Q4, the least since Q2 2021. On a y/y basis, the ECI edged down to 4.2% from 4.3% in the previous quarter. This was the slowest pace since Q3 2021 and has come down from a peak rate of 5.1% in Q2 2022, in line with the moderation in core PCE inflation.

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