Monthly Economic Insights- November, 2023
Cooling inflation means Fed rate hikes are likely finished
Consumer prices overall were flat last month vs. the prior month and rose only 3.2% from a year earlier, a slower pace than in September (3.7%), maintaining a decline that likely removes the possibility of any more rate hikes this year.
Stock and bond markets have so far welcomed the news with broad rallies that seemed to indicate investors are confident that historic interest-rate increases have ceased for now, and may even begin to come down by mid-2024.
Increases in so-called core prices, which exclude volatile food and energy items, showed underlying price pressures are abating with core inflation falling to 4.0% in October vs 4.1% in September, and 4.3% in August.
Our expectation would be for core inflation to continue this glide path lower as shelter (which represents 40%+ of core inflation) continues to slow from its October 6.7% rate (down from 7.2% in September and 7.3% in August) towards a low single digits rate by this summer.
The U.S. gross domestic product - the total output of goods and services – was also projected to grow at a more modest rate in the fourth quarter, further allaying fears of increased price pressures. The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 is 2.0 percent as of November 17, down from 2.2 percent on November 15.
With GDP growth in check, and unemployment ticking up slightly (3.6% to 3.9%) the runway for the so-called soft landing (with no recession) appears to be in sight.
Bottom Line: In October’s survey, the average forecast of economists was for no recession, a stark contrast to the consensus six months prior when economists predicted the economy would enter a recession within the following 12 months.
The probability of a recession appears to have dropped even further as indicated by the recent sharp rise of stocks and the decline in Treasury bond yields.
Caution is still warranted, however. Inflation hasn’t made it all the way back to the Fed’s target rate of 2%. The economy may also still face headwinds with the delayed impact of higher interest rates.
Finally, American consumer spending has buoyed the economy nicely for some time, but that may be slowing as well, as retail sales fell in October for the first time since March. Major retailers like Home Depot and Target have reported softer same store sales of late, so it will be interesting to see what Christmas brings, and not just for them, but for all of us. Early indications are that the holiday season is off to a solid start with Black Friday online sales +7.5% from a year ago and reaching a record $9.8B.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company
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