Flux analysis

The state of the US economy is still to be determined

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In early January, United States Treasury Secretary Janet Yellen declared that the US economy had achieved a long-sought soft landing, a historically unusual event. Her main argument was that the US inflation rate had dropped to around 3 percent without significantly damaging the labor market, which was stronger than expected.

Data from the US Bureau of Labor Statistics shows that the seasonally adjusted nonfarm employment increased by 216,000 in December 2023, surpassing market expectations of 170,000 and marking the highest increase since September.

In contrast, former president Donald Trump predicted in a recent interview that the US economy would crash. To assess the actual state of the US economy, it is necessary to analyze it based on the right economic indicators.

Even though inflation has been eased, the consumer price index is still rising by over 3 percent and the personal consumption expenditures by more than 2 percent, far from the Federal Reserve's inflation target.

According to recent data from the BLS, the CPI rose by 3.4 percent year-on-year in December, higher than the previous two months. More importantly, the core CPI year-on-year rate was 4 percent and the core PCE inflation rate was over 3 percent, both higher than the respective overall price increase, reflecting how complex and difficult it is to tame the current inflation in the US.

For the Fed to achieve its 2 percent inflation target, it will need to persist with the tight monetary policy, at least in the short term.

The two parties meanwhile are in constant dispute over fiscal budgets due to the US' massive debt burden. This also has an impact on the economy.

And the US labor market may not be as positive as indicated by the nonfarm employment increase. In December, the seasonally adjusted total employment population aged 16 and older decreased by 683,000 compared to the previous month, which dramatically deviated from the trend in new nonfarm employment.

According to the US Census Bureau, the US population grew by over 1.75 million to 336 million in 2023, which means an increase of about 443,000 in the fourth quarter. However, the BLS data shows that the labor force decreased by 676,000 in December from the previous month and by 446,000 compared to September.

If the total population is growing but the labor force and the total employment population aged 16 and older are falling, it signals a decline in labor force participation and a lack of willingness to work.

The quarterly changes in the US employment population and GDP growth can be tracked to study the correlation between the two. Both the change in the total employment population aged 16 and older and the number of new nonfarm employment show a certain correlation, though not a strong one, to the GDP growth, but the former is stronger.

For example, the US experienced two consecutive quarters of negative GDP growth in the first half of 2022. In the same period, the new nonfarm employment figures were quite positive, standing above 370,000 every month and 678,000 in the peak month. In contrast, the total employment population aged 16 and older in the second quarter decreased by 271,000, which was more consistent with economic contraction. Similar situations have occurred several times before.

Therefore, despite the acceptable performance of new nonfarm employment, the decrease in the total employment population aged 16 and older in the fourth quarter of 2023 should not be neglected.

The Christmas holiday at the end of December has a major impact on the labor force and employment numbers. Some people may quit their jobs during the season and seek a new one after the holiday, which partly explains the drop in the December employment figure.

However, it must be recognized that the seasonally adjusted data have largely eliminated the impact of such seasonal factors, and both October and December recorded employment decreases, resulting in the US' second quarterly decline after the pandemic. Therefore, whether employment will rebound in January will be critical to assessing the health of the labor market.

US trade contracted in the second half of 2023. According to recent data from the Bureau of Economic Analysis, imports from January to November in 2023 fell 3.6 percent year-on-year, with import of goods falling by 5 percent, or 2.1 percent after adjustment for price changes. Most of the months registered a negative growth.

The decline in US goods imports indicates a reduced demand for imported products, reflecting a sluggish demand for commodity consumption.

In 2023, the Conference Board repeatedly forecast an economic downturn in the US. After continuous falling over an extended period of time, the organization's Leading Economic Index (LEI) dropped past its recession warning threshold determined by historical experience. Therefore, it suggested that in the first half of 2024, the US GDP may record two consecutive quarters of negative growth, leading to a technical recession.

Yellen's claim of a soft landing is therefore premature.

Of course, many institutions and analysts believe that what the US economy will experience is a noticeable slowdown, not a recession. For example, in the World Economic Situation and Prospects 2024 report published by the United Nations Department of Economic and Social Affairs, it is forecast that the US economy will grow by 1.4 percent in 2024, which is 1.1 percentage points lower than the 2023 estimate. However, if a recession does not take place, inflation may stand above 2 percent for an even longer time.

The author is deputy chief economist with the China Center for International Economic Exchanges. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn