We can, of course, say goodbye to a soft landing if Congress and President Biden don’t agree on a deal to raise the debt ceiling before the US Treasury runs out of money.
If the government fails to meet its financial commitments and the self-inflicted crisis is not resolved quickly, the consequences would almost certainly devastate financial markets and trigger a deep recession.
Get trend lines
“Nobody should assume that the Fed can protect the economy from the potential short- and long-term effects of not paying our bills on time,” Fed Chair Jerome Powell told reporters May 3.
But let’s put the doomsday scenario aside for now. Here’s a look at the fundamentals and what they say about the future trajectory of the economy.
inflation
Background: The Fed took too long to react to rising consumer prices, but then quickly hiked interest rates from near zero to between 5 and 5.25 percent, the highest level since 2007. Inflation has cooled but remains uncomfortably high.
The data:
(Index of personal consumption expenditure, excluding energy and food.)
- Pre-COVID inflation rate: 1.7 percent monthly average for 2019.
- Pandemic peak: 5.4 percent in February 2022.
- Most recently: 4.7 percent in March 2023.
- Fed target: 2 percent.
Outlook: The Fed expects core PCE to end the year at 3.6 percent. This is more optimistic than the consensus forecast by private economists, which puts the PCE at 4 percent by the end of the year.
Most forecasters expect the Fed to pause rate hikes to see if inflation actually moderates further. Officials haven’t ruled out another hike, though Powell said during the May 3 news conference that “we’re a lot closer to the end than we are to the beginning.”
Financial markets are betting rates could fall as early as September. Unfortunately, this is based on the general view that the economy will slide into recession, forcing the Fed to lower borrowing costs as a cushion.
real estate market
Background: Higher mortgage rates have severely slowed single-family home sales. Prices are falling in some markets across the country, a trend that the greater Boston area is likely to follow.
The data:
(Single family homes, March vs. a year earlier.)
- Greater Boston sales: down 22 percent.
- Average price in the greater Boston area: $660,000, up 1.5 percent.
- US sales: down 2.4 percent.
- US median price: $375,700, down 0.9 percent.
(Source: The Warren Group, the National Association of Realtors)
Outlook: According to Bill McBride, who writes the CalculatedRisk housing market newsletter on Substack, home sales across the country will remain under pressure, although the market may have bottomed. Prices will continue to deteriorate, but a sharp drop is unlikely due to a lack of inventory.
employment
Background: The labor market has confused everyone. Despite interest rates rising and growth slowing, the unemployment rate hasn’t been this low since 1968. Job creation has slowed but remains well above its pre-pandemic pace.
The data:
(April)
- US unemployment: 3.4 percent.
- New jobs created in the US last year: 4 million (+2.6 percent).
The outlook: It is clear that the labor market is shifting.
Hiring has fallen from 354,000 in the last six months of 2022 to an average of 285,000 jobs per month this year through April. Job vacancies fell to 9.5 million in March, down from a record more than 12 million a year earlier.
Diploma
Inflation is falling, but it will take a long time to get back to the Fed’s 2% target.
While no one anticipates a housing crisis like the one that caused the Great Recession, prices will stagnate in some places and fall in others.
That puts all eyes on the job market.
The Fed won’t cut interest rates until labor demand returns to more normal levels — or until Uncle Sam fails to pay his bills for the first time in history.
Larry Edelman can be reached at [email protected] Follow him on Twitter @GlobeNewsEd.
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