Economic Growth Is Accelerating. Will Inflation Be Next?

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Last year the economy defied predictions that it would sink into a recession. This year it appears to be on track for another upside surprise.

Two measures of the services side of the economy indicated on Monday an increase in activity in January.

The Institute for Supply Management’s survey of business executives signaled a 13th-month of expansion for the services sector in January. Its purchasing managers index climbed to 53.4 percent, topping Wall Street’s expectations for a reading of 52.1.

The rise more than reverses the December decline, which saw the index fall to 50.5, the lowest level in seven months. This is the highest reading since September’s 53.6, when the overall economy was expanding a a 4.9 percent annualized pace.

A similar measure from S&P Global was also stronger than expected. The S&P Global PMI for the U.S. services sector suggested the fastest pace of expansion since June 2023.

New orders, a key measure of demand, rose at a faster pace. Demand improved from domestic customers as well as demand for exports, which rose at the steepest rate since August of last year.

Rising demand led to an expansion of payrolls and increased optimism about outlook over the next year. As well, backlogs of work orders rose for the first time in seven months, S&P Global said.
At least for now, inflation is a big question mark.

According to the S&P Global reading, inflation has remained tame in January, with pricing pressures coming down.

“The US service sector started the year in a sweet spot, with output and demand growth accelerating while price pressures cooled markedly,” S&P Global’s Christ Williamson said. “Business optimism about growth prospects in the service sector has likewise jumped higher, encouraging further payroll growth, albeit the latter limited by labor shortages.”

The ISM survey, however, did show a sizeable increase in its price component. The barometer of prices paid for materials and services by services-oriented businesses jumped from 56.7 to 64. Economist Liz Ann Sonders said this was the biggest month-to-month spike since August 2012.

The share of business saying they paid more for materials and services jumped from 15.8 percent to 35.5 percent. Most of the change came from businesses saying their costs were flat in December to saying they saw increased costs in January.

Many economists, including those at the Federal Reserve, do not believe the pace of recent economic growth is compatible with inflation coming down to the central bank’s two percent target. They expect growth to slow in the months ahead—an expectation that has been disappointed for over a year now.

The Atlanta Fed’s GDPNow measure, which attempts to interpret what incoming economic data suggest about economic growth, currently has the economy growing at a 4.2 percent pace in the first quarter of this year, up from the 3.3 percent pace of the fourth quarter of 2023.


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