Now for 2024

Employers have hired. The unemployment rate has remained neatly below 4 percent, and stands at below 3 percent in many major metropolitan areas. Even home prices, which were expected to give back much of their pandemic-era gains, have been climbing recently.

Indeed, rather than slow down, the economy has been gathering steam as the year has progressed. During the first quarter, U.S. gross domestic product expanded 2.0 percent. The next quarter ushered forth an equally satisfying 2.1 percent performance. For much of the third quarter, the economy has been on pace to expand at a faster than 3 percent rate. None of this are indicia of recession. Consumer spending continues to drive activity forward. So, too, does the current era of the megaproject, with construction firms benefitting from surging infrastructure and industrial construction as the federal government continues to pour monies into the economy and as supply chains return to America with fury.

The ability of the U.S. economy and its interest rate sensitive construction sector to power through a period of weak global growth, bank failures, and higher borrowing costs has been simply mystifying. Capitulating to ongoing momentum, many economists have simply dropped their recession forecasts, including economists from J.P. Morgan and Bank of America.

Serving as evidence that one can in fact have their cake and eat it too, the economy has continued to expand even as inflation has abated. In June 2022, inflation as measured by the Consumer Price Index stood at 9.1 percent. By August 2023, this figure stood meaningfully below 4 percent, though core measures of inflation, which exclude food and energy prices, suggested that inflation was a bit hotter than that. Nonetheless, the pace at which prices are rising has softened markedly. During a recent 12-month period, construction materials prices declined, including in categories like steel, lumber, and crude oil-based products.

The question is why. There are many who would simply give the Federal Reserve credit for the dip in inflation. After all, America’s central bankers have been raising interest rates since March 2022. At that time, the upper limit on the Federal Funds rate, the Federal Reserve’s principal policy instrument stood at 0.25 percent. That same rate ended September 2023 at 5.5 percent. Economists suggest that as interest rates rise, growth slows down and inflationary pressures abate.

It seems so simple. But it is not. There is another explanation for falling inflation – vastly improved supply chains. While many contractors and manufacturers will point out that equipment shortages remain and lead times remain elevated in certain categories, supply chains are meaningfully more dependable than they were in late-2021.

As supply chains normalize and approach complete operability, two things occur. First, pent-up demand is belatedly satisfied, in whole or in part. That results in a profound level of transactional volume. That transactional volume translates into economic growth. Second, as unmet demand is satiated, scarcity abates. That results in less significant price increases and in certain instances outright price declines.

Accordingly, one could theorize that the Federal Reserve’s rate increases have to date had precious little impact on the macroeconomy. Sure, there has been the failure of banks like Silicon Valley Bank (March 10th) and Signature Bank (March 12th) that can be laid at the Federal Reserve’s doorstep, but consider the fact that this has been a period of rising home prices, robust hiring, and equity market gains. That suggests that rate increases to date have not substantially bent the economy’s growth trajectory.

But that can change. As indicated by the highly regarded President and CEO of the Atlanta Federal Reserve Bank, Raphael Bostic, tighter monetary policy can take between 18 months to two years or longer to materially impact inflation. If that is true, then much of the impact associated with higher interest rates has yet to be experienced, and that jeopardizes economic progress.

There are others, however, that would suggest that all of that is hogwash. The economy has enough momentum to power through current and forward-looking high interest rates. As of this writing, the U.S. economy has added approximately 236,000 jobs/month in 2023. Through July, there were 8.8 million available unfilled jobs in America, with nearly 400,000 of them associated with construction and more than half a million associated with the nation’s manufacturing sector. In short, demand for workers remains high. As long as it does, the economy will continue to add jobs and spending power. Many reason that that will suffice to keep inflationary forces at bay.