Economic growth in the US is off to a better start than expected this year, thanks largely to a long-awaited pickup in consumers buying “stuff” again after they shifted spending to experiences in 2022. Shoppers have been spurred by a rapid deceleration in goods inflation, reducing some of the risks associated with a softening in the labor market.
On an inflation-adjusted basis, goods consumption climbed 5% year-over-year in December, its fastest growth since early 2022, with strong demand in both the durables and non-durables categories.
The driving force for this is straightforward; prices are still up significantly compared with pre-pandemic levels, but consumers are no longer seeing price increases in the things they buy. There was no goods inflation in December on a year-over-year basis, according to the Personal Income and Outlays report, a trend that’s broadly persisted since the middle of last year. With the labor market still resilient, workers — who are continuing to get raises — have the income to buy more stuff, and they’re choosing to do so.
Companies have been calling out this shift in their recent earnings updates. Procter & Gamble Co. talked about demand rebounding and volume growth going from -3% to 4% in North America over the past several quarters. The logistics company JB Hunt Transport Services Inc. noted that volumes for its intermodal business unit — freight boxes that are passed between trains and trucks — grew 6% in October, 6% in November and 8% in December, all on a year-over-year basis. Executives at Packaging Corporation of America, which makes containerboard and other products tied to e-commerce and the shipping of goods, said that demand is up 8% from a year earlier so far in January, and they see that continuing throughout the quarter.
The ability to buy more thanks to a lack of goods inflation is also feeding a revival in confidence. Tuesday’s Conference Board report showed that consumers’ assessment of the present situation rose in January to its highest level since March 2020.
This pickup in goods consumption doesn’t mean it will be smooth sailing for the industrial economy. The disinflation that consumers are benefiting from reflects excess capacity. Companies are still largely in the mode of trying to do more with less rather than building new factories to prepare for future demand.
Still, the economic data we’ve gotten so far shows a strong start to the year. The Federal Reserve Bank of Atlanta’s tracker is currently at 3% real gross domestic product growth for the first quarter — with 2.4% of that coming from consumption — well ahead of the 1% median forecast of economists polled by Bloomberg. Additionally, because the United Auto Workers strike detracted 0.7% from growth in the final three months of 2023, there’s the potential for a one-off boost as normal activity resumes.
There remain soft spots in the economy worth watching. Some white-collar employers, particularly in the technology and media sectors, continue to find themselves with cost structures that don’t satisfy their investors. We’ve already seen a steady drumbeat of sizable job cuts from the likes of PayPal Holdings Inc. and Microsoft Corp.’s video-game divisions despite the upbeat outlook for consumers.
But for an economy that’s 70% consumption, it’s the state of American shoppers that’s crucial to the near-term trajectory of growth, particularly their spending on goods that drive activity in ancillary manufacturing and industrial sectors. And the message from the economic data and corporate earnings over the past few weeks is that the disinflationary growth we got in 2023 continues to defy the skeptics in the new year.
As the Federal Reserve ponders its next move, nothing we’ve seen so far should change the view that officials have gotten enough progress on core inflation to begin cutting interest rates. But the uptick in goods consumption should reduce the risk of bad labor market outcomes, suggesting that policy easing can be more tactical than aggressive.
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