Data show economy is booming. Wall Street thinks otherwise
Recent CPI and producer-price index reports both pointed to an unexpected increase in price pressures in Jan
Data suggesting the U.S. economy is too hot for comfort are getting a cool reception in some corners of Wall Street. A handful of high-profile economic reports, covering the big topics of inflation , economic growth and the labor market , have leaned decidedly on the too-warm side. But many economists have minimized these surprises, pointing to other data that are less alarming and measurement challenges that are unique to the start of the year.
Such arguments have been eagerly accepted by investors who have been rooting for growth strong enough to avoid a recession but mild enough to allow the Federal Reserve to cut interest rates—a seemingly narrow path, with inflation running above the Fed’s 2% target.
While it isn’t unusual for investors to look past reports contradicting a hopeful narrative, economists also often warn against overreacting to one round of often-volatile data, whether good or bad. The S&P 500 ended last week just 0.5% off a record high and investors continued to bet on rate cuts later this year.
“From a very big picture perspective, it’s still looking good,” said Brian Rose , senior U.S. economist at UBS Global Wealth Management.
Last week’s consumer-price index (CPI) and producer-price index reports both pointed to an unexpected increase in price pressures in January following months of mostly cooling inflation.
The data, on its face, were about the last thing investors wanted. Still, many economists argued that the uptick was likely a one-time event related to businesses resetting prices at the start of the year. Price increases were particularly large in labor-intensive services such as medical care and car repair, suggesting those employers felt compelled to raise prices to keep pace with the increased cost of workers.
The CPI report “was a little hotter than I anticipated, but I take caution in reading too much in any January report,” said Gregory Daco , chief economist at EY, the accounting and consulting firm.
Questions about other data also have focused on oddities related to the month of January.
The Labor Department’s most recent reading on nonfarm payrolls showed the economy added 353,000 jobs last month—well above what economists were anticipating and the biggest gain since the previous January.
The catch in the data was that 353,000 was a seasonally adjusted number. Every year, many businesses hire workers ahead of the holidays and then lay off some in January. To better gauge the trend in hiring, the Labor Department accounts for these seasonal patterns, so that a big drop in actual January payrolls often shows up as a seasonally adjusted gain.
Few question this basic practice. But many investors believe that the adjustment for this January was overly aggressive, arguing that businesses laid off fewer workers than normal because they had hired less in the months before. In effect, they say, the calendar has become less important for businesses.
As a result, many expect the big gain in January to be offset by weaker numbers in the coming months, when the Labor Department anticipates a seasonal rebound in hiring.
Discounting the importance of January data extended to the one notable exception in the run of strong economic reports. Data released Thursday showed that retail sales fell 0.8% last month, a sign that resilient consumer demand might finally be abating.
Many analysts, though, said that spending was likely depressed by unusually bad winter weather.
In the case of overall growth, grossdomestic-product numbers showed the economy expanding at an inflation-adjusted pace of 4.9% in the third quarter of last year and 3.3% in the fourth quarter. Both figures are comfortably above the roughly 2% rate that many economists believe is sustainable without driving up inflation.
But an alternative measure of growth—gross domestic income— has been running well below GDP figures since late 2022, and was just 1.5% in the third quarter of 2023, its most recent release.
Theoretically, GDP and GDI should be equal. The Commerce Department, which produces both reports, officially considers GDP “more reliable because it’s based on timelier, more expansive data.” But analysts noted that an average of the two has proved the best at predicting what the government’s final GDP estimate will be for a given quarter.
“We still think that real output is at most growing modestly above potential, despite the much stronger GDP data,” analysts at Goldman Sachs wrote in a recent report, citing the GDI figures and their own growth estimates.
As of Friday, interest-rate futures suggested that there was a greaterthan-50% chance the Fed would start cutting rates by its June policy meeting. They also indicated that investors believe the central bank will likely cut rates by a quarter-percentage point at least three more times by the end of the year.
Analysts have hardly dismissed recent economic data entirely. In addition, some are more worried than others that it is now looking harder for the economy to achieve the much wished-for soft landing, with inflation stabilizing at 2% without a recession.
Though not proof, recent data have suggested that current interest rates aren’t providing as much drag on the economy as Fed officials have thought, said Joe Davis , global chief economist at Vanguard.
“I’m growing concerned that there’s going to be a strong desire to cut rates when the labor market has not fully balanced—it’s cooled but it’s still tight,” he added.