This week, Craig Siminski, of CMS Retirement Income Planning, shares with us an article discussing the current state of U.S. economic activity and the prospects for continued growth as higher interest rates work their way through the economy:
Economists have been predicting a recession for the U.S. economy ever since the Federal Reserve began aggressively raising interest rates in 2022. This is Econ 101. High interest rates, which make it more expensive to borrow, are intended to tame inflation by slowing business and consumer spending. A rapid and extreme increase in rates, as the Fed has carried out over the last year and a half, can be expected to slam the economy into reverse.
The classic example is the early 1980s, when the Fed pushed the economy into a deep recession in order to stop runaway double-digit inflation.
So far, the economy is proving resilient in the face of interest-rate pressure. Inflation, as measured by the 12-month change in the consumer price index (CPI), dropped from a high of 9.1% in June 2022 to 3.2% in July 2023. Growth in real gross domestic product (GDP) was a solid 2.1% in Q2 2023, and the August unemployment rate was 3.8%, up from 3.5% in July but still near a 50-year low.
These “headline” numbers suggest an economy coming in for a “soft landing” — a term for controlling inflation without serious economic damage. As with most headlines, however, the full story is more complex.
Long-term Inflation Prospects
Although consumers may notice the ups and downs of prices, the Fed is primarily concerned with controlling the longer-term inflationary trend. Its preferred measure is the price index for personal consumption expenditures (PCE), which captures a wider range of spending than the CPI, and the target for a healthy economy is PCE inflation of 2.0%. The 12-month change in the PCE price index was 3.3% in July 2023, down from a high of 7.0% in June 2022. The Fed also looks closely at “core” PCE, which excludes volatile food and energy prices and ran at a 4.2% 12-month rate in July.
These numbers have trended downward over the last year, but they ticked upward in July and are still above the Fed’s target. It remains to be seen whether…
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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 25 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.
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