US economy is doing too well? The Fed and Wall Street seem to think so

As 2023 ended, there were questions as to whether the strong US economy that we've been in for the last 3 years was going to continue. We'd seen softening numbers for both inflation and consumer spending growth, and even job growth had fallen off some in the later part of 2023.

But for the first three months of 2024, we've seen US job growth pick up and inflation bump up to its fastest 3-month increase since last Summer. And that's leading to some changes in outlook. For example, International Monetary Fund said this week that the US is going to outpace the rest of the developed world in economic growth this year.

The IMF revised its forecast for 2024 U.S. growth sharply upward to 2.7% from the 2.1% projected in January, on stronger-than-expected employment and consumer spending. It expects the delayed effect of tighter monetary and fiscal policy to slow U.S. growth to 1.9% in 2025, though that also was an upward revision from the 1.7% estimate in January.

European Central Bank President Christine Lagarde has cited the stark divergence between the U.S. and Europe, which is facing slower growth and faster-falling inflation.

The latest IMF forecasts bear this out, with a downward revision to the euro zone 2024 growth forecast to 0.8% from 0.9% in January, primarily due to weak consumer sentiment in Germany and France. Britain's 2024 growth forecast was revised down by 0.1 percentage point to 0.5% amid high interest rates and stubbornly high inflation.

Soon after that IMF report came out, we got confirmation that US consumer spending in America was robust for the 1st Quarter of 2024, coming in above what the "experts" were predicting.

U.S. consumer continued to spend freely in March.
Retail sales rose 0.7% m/m (consensus 0.4%) following upwardly revised 0.9% (from 0.6%) in Feb.
Ex autos, retail sales surged 1.1% m/m (consensus 0.5%) following upwardly revised 0.6% increase (from 0.3%) in Feb. https://t.co/TtuAHQsj50 pic.twitter.com/ztGnB7U22B

— Traders Community (@TradersCom) April 15, 2024

This strong economic performance and outlook led Fed Chair Jerome Powell to say this week that interest rate cuts are going to come later in 2024, if at all.

Federal Reserve Chair Jerome Powell cautioned Tuesday that persistently elevated inflation will likely delay any Fed interest rate cuts until later this year, opening the door to a period of higher-for-longer rates.

“Recent data have clearly not given us greater confidence” that inflation is coming fully under control and “instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell said during a panel discussion at the Wilson Center.

“If higher inflation does persist,” he said, “we can maintain the current level of (interest rates) for as long as needed.”…

In the past several weeks, government data has shown that inflation remains stubbornly above the Fed’s 2% target and that the economy is still growing robustly. Year-over-year inflation rose to 3.5% in March, from 3.2% in February. And a closely watched gauge of “core” prices, which exclude volatile food and energy, rose sharply for a third straight month.

As recently as December, Wall Street traders had priced in as many as six quarter-point rate cuts this year. Now they foresee only two rate cuts, with the first coming in September.

Not great if you're a borrower, or if you were anyone else counting on interest rates dropping from their 23-year highs. It's also spooked the stock market, which has seen all of the gains of the first three months of the year go away in April, as the odds for rate cuts have declined.

I'm not going to complain about increased job and consumer spending growth, and you shouldn't either. Unless inflation stays at or above a 4% annual rate for the next 3 months, there's not much that's going to cause real concerns in the actual economy. I'd still argue that our current rates are too high and are making the market for single-family homes even tighter than it already was, but I'm also starting to accept the reality that those rates won't go down any time soon. So adjust and invest accordingly.