Economy

The Treasury Secretary acknowledged that consumer prices, which have weighed on economic sentiment, continue to be too high.Treasury Secretary Janet L. Yellen criticized the Trump administration’s economic policies, while praising the Biden administration for successfully navigating the pandemic.Yuri Gripas for The New York TimesTreasury Secretary Janet L. Yellen defended the Biden administration’s economic agenda on Thursday, drawing sharp contrasts with the policies of the Trump administration as President Biden begins to make the general election argument that he has been a stronger steward of the economy than his predecessor.The comments from Ms. Yellen came after new data released on Thursday bolstered that message: The United States economy grew at a healthy clip over the past year, surpassing 3 percent and defying expectations of a recession. The strong numbers coincided with an effort by the White House to amplify the president’s economic record and dispatch his top economic advisers around the country to make the case that his strategy is working.Biden administration officials are trying to convince a skeptical public that, while they may feel pessimistic about the economy, its performance is delivering gains to average Americans. Officials are expected to spend the coming months highlighting the investments that Mr. Biden has directed toward infrastructure, domestic manufacturing and clean energy projects.In a speech at the Economic Club of Chicago, Ms. Yellen argued that the Biden administration had successfully navigated challenging headwinds caused by the pandemic and led a recovery that has outpaced those in the rest of the world. She also suggested that the Biden administration needed more time to tackle affordability issues, such as improving access to child care and housing.“Our economic agenda is far from finished,” Ms. Yellen said.The Treasury secretary also took the rare step of directly criticizing the policies of Mr. Biden’s predecessor and likely opponent, former President Donald J. Trump. Pointing to Mr. Trump’s repeated pledges to rebuild America’s roads and bridges, she recalled how those promises went unfulfilled.“Our country’s infrastructure has been deteriorating for decades,” Ms. Yellen said. “In the Trump administration, the idea of doing anything to fix it was a punchline.”We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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The increase in gross domestic product, while slower than in the previous period, showed the resilience of the recovery from the pandemic’s upheaval.The U.S. economy continued to grow at a healthy pace at the end of 2023, capping a year in which unemployment remained low, inflation cooled and a widely predicted recession never materialized.Gross domestic product, adjusted for inflation, grew at a 3.3 percent annual rate in the fourth quarter, the Commerce Department said on Thursday. That was down from the 4.9 percent rate in the third quarter but easily topped forecasters’ expectations and showed the resilience of the recovery from the pandemic’s economic upheaval.The latest reading is preliminary and may be revised in the months ahead.Forecasters entered 2023 expecting the Federal Reserve’s aggressive campaign of interest-rate increases to push the economy into reverse. Instead, growth accelerated: For the full year, measured from the end of 2022 to the end of 2023, G.D.P. grew 3.1 percent, up from less than 1 percent the year before and faster than the average for the five years preceding the pandemic. (A different measure, based on average output over the full year, showed annual growth of 2.5 percent in 2023.)“Stunning and spectacular,” Diane Swonk, chief economist at KPMG, said of the latest data. “We’ll take the win.” More

Should the Federal Reserve cut policy rates in March? If you look at the so-called Taylor rule — named after the legendary American economist John B Taylor — the answer is a definite “yes”.After all, this formula — which projects the optimal rate using variables such as price levels, unemployment and real income — currently implies that “the fed funds rate today should not be 5.5 per cent but 4.5 per cent”, as Torsten Sløk, chief economist at Apollo, notes.That is a big gap. No wonder markets have moved in a way that implies there will be half a dozen US rate cuts this year, with a 70 per cent probability that this starts in March.But if you listened to the chatter that emanated from the World Economic Forum last week, the answer would be very different. “It’s too early to declare victory [over inflation],” François Villeroy de Galhau, the governor of France’s central bank, told participants in Davos. “The job is not yet done.”Or as Philipp Hildebrand, former head of the Swiss central bank and now at BlackRock, echoed: “At some point we’re going to realise that it’s not that easy to stabilise to the 2 per cent inflation targets that central banks are looking for, and so the optimism in rates in the US in particular is probably overdone.” One could deduce from such statements that some think the Taylor rule is wrong, and/or best ignored. Does this matter? A cynic might say not. Central bankers always dislike the idea of being front-run by markets, and many economists consider the once-hallowed rule to be excessively crude. But to my mind this dissonance points to a much bigger question that investors need to ponder: will political factors dominate economic fundamentals in 2024, or vice versa? Or, to put this in monetary policy terms: will inflation be shaped primarily by demand cycles and economic fundamentals this year? Or will supply-side issues, often linked to politics, rule?Until recently, the working assumption for most central banks and economists was that demand cycles mattered most. Hence the widespread use of neat models — like the Taylor rule — that forecast the future by using past data about economic fundamentals. But Covid overturned this sunny confidence, since inflation surged due to supply chain shocks in 2021, then tumbled in 2023 when the shocks eased. To be fair, demand mattered too: as recent blogs from the White House Council of Economic Advisers note, a Covid fiscal stimulus boosted demand in a way that contributed to price growth. Last year’s rate rises did the reverse.However, the CEA calculates, using research by Janet Yellen before she became Treasury secretary, that 80 per cent of recent disinflation was due to supply swings. Which, of course, lie outside the Fed’s control — and its models.This is humbling for central bankers. So, too, for business leaders. Back in January 2023, for example, I asked a group of top executives to predict US inflation trends. Most forecast a figure above 6 per cent in 2024, way above the current 3.4 per cent.The good news is that some economists are trying to change their models in response. Elisa Rubbo of Chicago Booth, for example, has developed a “Divine Coincidence index” that tracks supply shocks alongside demand swings in inflation forecasts.The bad news, however, is that this work is in its infancy and has not been officially incorporated into central bank models. Hence the key question: how will these supply and demand patterns play out in 2024, in the US and elsewhere?If you are an optimist focused on economic fundamentals — as many in Davos were — you will assume that demand cycles rule. After all, the Covid lockdowns have ended and companies are now more adept at managing supply chain shocks, be they a loss of Russian gas or shipping disruptions. Indeed, a poll by Bank of America shows that a large majority of global investors expect a “soft” landing or better in 2024 — the most optimistic reading for almost two years.But if you are a pessimist, political issues cannot be ignored. Geopolitical conflict is already raising transport prices. Just look at the latest attacks by Houthis in the Red Sea. And while the immediate impact of that has been mitigated by the fact that shipping usually declines in January anyway, the World Bank recently warned that its index of global supply chain stress is rising, and could repeat patterns last seen during the pandemic if the Red Sea disruption continues. Other conflicts also pose threats, as do domestic politics. Greg Jensen of Bridgewater, for example, thinks investors are “under-discount[ing]” the inflationary threats that could arise from any putative Donald Trump presidential victory, since Trump would probably appoint a compliant Federal Reserve governor, impose high trade tariffs and unleash expansionary fiscal policy. Of course, central bankers themselves are not allowed to factor in such risks in their models, or at least not officially. But risks of this sort explain why the Davos mood music was at odds with the market pricing. And it points to two key lessons: first, economists of all stripes urgently need to study supply-side issues, not just demand cycles; and second, it is smart for CEOs and investors to hedge this year. The potential range of outcomes is extremely wide. [email protected] More

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This article is an on-site version of our Britain after Brexit newsletter. Sign up here to get the newsletter sent straight to your inbox every weekGood afternoon. Another busy week in Brexitland where London mayor Sadiq Khan upset Brexit purists for suggesting that a youth mobility deal with the EU might be good for London.Conservative party chair Richard Holden told GB News that Khan was “plotting to rip up our new relationship with the EU” and “drag us back” by “stealth” — I wonder if anyone sent him the memo about the British government trying to negotiate exactly such deals with EU countries such as Spain, Netherlands and Germany?We also heard trade secretary Kemi Badenoch having to confess that the government had missed its manifesto target of signing trade deals that account for 80 per cent of trade by the end of 2022 — she blamed Joe Biden.More substantively, the government produced an update on its plans to “review or revoke” all the retained EU law (REUL) that was sucked on to the statute book when the UK left the bloc to preserve legal certainty at the point of exit.You’ll recall this caused a significant kerfuffle last year when the government pledged to complete this mammoth task by the end of 2023, with any law that wasn’t reviewed by the deadline simply falling off the statute book by virtue of an automatic “sunset clause”. This was obviously a bad idea given the sheer amount of law involved and Prime Minister Rishi Sunak was inevitably forced to ditch the guillotine idea, much to everyone’s relief. (Although, lest we forget, Sunak had promised to do it in 100 days during the Tory leadership contest against Liz Truss.)So where are we at with this project? The business department published an update this week on the progress, which has been handily summarised by Simon Usherwood, professor of politics at the Open University.As his charts show, the vast bulk (67 per cent) of what we must now call “assimilated law” is at present unchanged, but that is partly because the amount of REUL being discovered by government departments has continued to grow. Usherwood calculates that on the planned trajectory for reviewing the REUL to 2026, the UK still ends up “with more pieces of unchanged (if assimilated) REUL at the end than we originally thought existed” thanks to the rate of new discoveries. Amazing.The material question is whether this great stocktake of EU regulation is going to yield the promised Brexit benefits in a way that will make a difference to the UK economy.I was talking this week to a British company in the food technology space that does want a piece of EU law repealed (which sets a mandatory time limit on approvals for novel technology), arguing that it was a function of the need to consult 27 other countries.Go-it-alone Britain shouldn’t need such long lead times, the food company bosses argued — and said the regulator privately agreed — but it still hadn’t found the bureaucratic capacity to get the law changed. That is itself a story of Brexit in miniature.Realistically, it is too early to say how much benefit will be accrued by this process, although on past performance the size of the task and gravitational pull of the EU suggests the wins will be hard-fought.This week, the UK in a Changing Europe published the latest version of its Divergence Tracker which logs some important changes to EU-era law, namely on bankers’ bonuses, some elements of GDPR data protection rules and the banning of live animal exports for fattening and slaughter.The accompanying briefing from Joël Reland finds, however, that while politically totemic, the changes will have “limited impact in practice” since they are “watered down versions” of previously more ambitious proposals.On the other side of the ledger, the EU is piling up its own new rules on areas including products made with forced labour, corporate sustainability, due diligence, carbon border taxes, plastic packaging and sustainable product design.These will land on UK companies that trade with the EU or are indirectly part of EU supply chains because they supply larger companies that do trade with Europe. Swings and roundabouts.The overall picture is one of complexity, combined with inertia. This was neatly summed up this week by the deepening retreat over the use of the “UKCA” conformity assessment mark, with another announcement slipped out by the business department.The UKCA mark was initially envisaged as a British rival to the EU’s own “CE” mark but has slowly been ditched under pressure from business. Per the latest announcement, a “fast-track provision” now allows you to slap a UKCA label on your product if it conforms to EU standards. Truly, a paper tiger.But what’s symbolic of the broader regulatory Balkanisation caused by Brexit is that the business department announcement only covers those industrial products that fall under its remit. Some products, such as medical devices and construction products, have different rules because they’re covered by different departments, such as health and housing.Overall, the impact of these changes will take time to play out, for good or ill, or most likely a bit of both.What’s interesting is that even where the government has tried to create certainty in the REUL process, lawyers warn that uncertainty is created simply by removing the EU as the reference point for pre-existing laws.One vital area is employment law, according to Louise Mason, a senior associate at Linklaters, because it is a body of law that has essentially grown up during the lifetime of UK membership.As part of the REUL process, the government took steps to codify the case law governing working-time regulations covering areas including holiday pay and equality rights, such as protections for pregnant women, in order to avoid such core employment rights being lost.So far, so good. But Mason warns that condensing a large body of case law into written principles has itself thrown up questions about how to interpret that codification, which will lead in time to further litigation.And as Mason observes: “All the codification is doing is trying to solve a problem that was created by passing the act in the first place.”It’s not yet clear how that will play out in the courts in areas such as holiday rights and the rules that trigger consultation for collective redundancy (UK and EU law differ on this point) and only as new cases pass through the UK courts will we find out. But as Christophe Humpe, a competition and regulatory legal specialist at Macfarlanes, puts it, the removal of the old EU foundation of the law created that uncertainty. “Effectively it gives you a new set of tools and you await to see if an opportunity arises to use those rules.”As ever, the lawyers never lose.Brexit in numbersThis week’s chart is a newsletter exclusive and comes courtesy of John Springford, at the Centre for European Reform. It addresses one of the conundrums of post-Brexit trade patterns that have perplexed researchers and economists.Here’s the question Springford poses: “The UK’s goods exports to the EU have not performed any worse than to the rest of the world, and its services exports have grown strongly. How come?”On goods trade, the answer — set out beautifully in this short paper — is that the superficially strong headline numbers conceal the fact that when markets reopened after Covid-19 lockdowns the UK got left behind.What the numbers show is that while trade between EU member states boomed during the bounceback, the UK didn’t get in on the action — and the obvious reason for that, Springford argues, is the barriers to trade erected by the Trade and Cooperation Agreement (TCA).If Britain’s total exports to the EU had grown in line with those of EU member-states, they would have been 27 per cent higher than they were in August 2023 (the last month for which we have comparable data). Since exports to the EU make up around half of Britain’s total, this suggests its total goods exports are around 13.5 per cent down, or £13.4bn on a quarterly basis.So, on the basis of that analysis, as Springford observes, “the fact that EU and non-EU [goods] exports moved together is a sign of weakness, not robustness” because really UK exports to the EU should have been booming.On services, where the UK has continued to perform strongly — contrary to the pre-Brexit consensus of many economists — Springford also uses a counterfactual analysis that again paints a less rosy picture than the headlines suggest.Although UK services exports growth has outperformed the average of advanced economies in some categories — such as business services (consulting), insurance and pensions — in two important sectors that are both exposed to the barriers created by the TCA — financial services and transportation — the UK performance is below par. If the UK’s exports in these two sectors had performed in line with the global average of advanced economies from single market exit to the second quarter of 2023, then Britain’s total services exports would be 11 per cent, or £10bn higher in that quarter. Again, that’s broadly in line with the 4-5 per cent hit to GDP.Taken together, the “hit” against the counterfactual is about £23bn, which Springford notes is consistent with the counterfactual modelling that predicts a 4 to 5 per cent hit to gross domestic product from Brexit, predicated on a 10 to 15 per cent hit to trade in both goods and services.Counterfactuals are always contentious, but while imperfect, logically they have to be the best way to assess the impact of Brexit — even if we’ll never definitively find out because no one actually lives in the UK that didn’t Brexit.It will be fascinating to see how other trade economists respond.Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.Recommended newsletters for youInside Politics — Follow what you need to know in UK politics. 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European Central Bank President Christine Lagarde said Thursday she was proud to lead the institution, after her performance was criticized in a union-run survey.
Lagarde said that the ECB’s own surveys suggested people were happy to work at the central bank and had a sense of mission.
“What keeps me going is those answers,” she told reporters at the January monetary policy briefing.

European Central Bank President Christine Lagarde looks on as she attends the European Parliament’s Committee on Economic and Monetary Affairs, at the European Parliament, in Brussels, Belgium September 25, 2023. 
Yves Herman | Reuters

President Christine Lagarde on Thursday said she was “proud and honored” to leead the European Central Bank, after her leadership was slammed in a union-run survey of staff.
She was responding to a question about the findings, published by ECB union IPSO earlier this week, in which more than half of respondents rated her performance so far as “very poor” or “poor.”

The survey’s qualitative responses suggested some staff believed she had created a negative atmosphere at the central bank, and that she spends “too much time on topics unrelated to monetary policy,” IPSO said.
Appearing unfazed, former politician and lawyer Lagarde said that the ECB conducted its own surveys in a “way that we can trust.” These showed a majority of respondents say they are happy to work at the institution, would recommend working there to a friend, and felt a mission associated to their work.
The surveys are conducted by around 60% of employees, and also cover wages, respect in the workplace and workplace satisfaction, she said.

“We pay great attention to these technically sound responses and we act upon them, and we will continue to do so. What keeps me going is those answers,” Lagarde told reporters in a briefing following the ECB’s January monetary policy meeting.
“And I’m extremely proud of the staff of the ECB, and I’m very proud and honored to lead the institution, because we are driven by mission. Delivering price stability, but serving the Europeans, and we will continue doing that,” she continued.

IPSO’s survey was completed by around 1,100 people. The ECB has more than 5,000 employees and trainees.
The union said the responses “generally” described Lagarde as being “an autocratic leader” who does not necessarily act according to the values she proclaims.
She was rated significantly more poorly than her predecessors Jean-Claude Trichet and Mario Draghi, it said.
An ECB spokesperson called the survey “flawed” and said it included topics that were not specific to the presidency and outside of IPSO’s remit. They also said it could have been filled out multiple times by the same person.

—CNBC’s SiIvia Amaro contributed to this article. More

GDP, a measure of all the goods and services produced, increased at a 3.3% annualized rate in the fourth quarter of 2023. Wall Street had been looking for a 2% gain.
The U.S. economy for all of 2023 accelerated at a 2.5% annualized pace, well ahead of the Wall Street outlook at the beginning of the year for few if any gains and better than the 1.9% increase in 2022.
A strong pace of consumer spending helped drive the expansion, as did government spending.
There also was progress on inflation. Core prices for personal consumption expenditures rose 2% for the period, while the headline rate was 1.7%.

The economy grew at a much more rapid pace than expected while inflation eased in the final three months of 2023, as the U.S. easily skirted a recession that many forecasters had thought was inevitable, the Commerce Department reported Thursday.
Gross domestic product, a measure of all the goods and services produced, increased at a 3.3% annualized rate in the fourth quarter of 2023, according to data adjusted seasonally and for inflation.

That compared with the Wall Street consensus estimate for a gain of 2% in the final three months of the year. The third quarter grew at a 4.9% pace.

In addition to the better than expected GDP move, there also was some progress on inflation.
Core prices for personal consumption expenditures, which the Federal Reserve prefers as a longer-term inflation measure, rose 2% for the period, while the headline rate was 1.7%.
On an annual basis, the PCE price index rose 2.7%, down from 5.9% a year ago, while the core figure excluding food and energy posted a 3.2% increase annually, compared with 5.1%.
The two components together added up to “supersonic Goldilocks, because it’s really a strong number yet inflation hasn’t shown up,” said Beth Ann Bovino, chief economist at U.S. Bank. “Everybody wanted to have fun. People bought new cars, a lot of recreation spending as well as taking trips. We’ve been expecting a soft landing for some time. This is just one step in that direction.”

The U.S. economy for all of 2023 accelerated at a 2.5% annualized pace, well ahead of the Wall Street outlook at the beginning of the year for few if any gains and better than the 1.9% increase in 2022.
As had been the case through the year, a strong pace of consumer spending helped drive the expansion. Personal consumption expenditures increased 2.8% for the quarter, down just slightly from the previous period.
State and local government spending also contributed, up 3.7%, as did a 2.5% increase in federal government expenditures. Gross private domestic investment rose 2.1%, another significant factor for the robust quarter.
The chain-weighted price index, which accounts for prices as well as changes in consumer behavior, increased 1.5% for the quarter, down sharply from 3.3% in the previous period and below the Wall Street estimate for a 2.5% acceleration.
“This year has been like Rock ‘Em Sock ‘Em Robots, and the economy is knocking the blocks off the economists, always outperforming,” said Dan North, senior economist with Allianz Trade Americas. Fed Chair Jerome Powell “has got to have a smirk on his face this morning. Again, he’s defying the economists’ predictions with strong growth and inflation clearly coming under control.”
Markets showed only a modest reaction to the report. Stock futures gained slightly while Treasury yields moved lower. Futures markets continued to reflect the likelihood that the Fed will enact its first rate cut in May, though the CME Group’s FedWatch gauge put the odds of a March cut at 47.4% around 10 a.m. ET.
“It was a great report, but you didn’t see the market move much because GDP is backward-looking. It told us what happened in October and November and December,” North said. “It’s great for historical patterns, but it doesn’t really tell us much about where we’re headed.”
In other economic news Thursday, initial jobless claims totaled 214,000, an increase of 25,000 from the previous week and ahead of the estimate for 199,000, according to the Labor Department. Continuing claims rose to 1.833 million, an increase of 27,000.
The GDP report wraps up a year in which most economists were almost certain the U.S. would enter at least a shallow recession. Even the Fed had predicted a mild contraction due to banking industry stress last March.
However, a resilient consumer and a powerful labor market helped propel the economy through the year, which also featured an ongoing pullback in manufacturing and a Fed that kept raising interest rates in its battle to bring down inflation.
As the calendar turns a page to a new year, hopes have shifted away from a recession as markets anticipate the Fed will start cutting rates while inflation continues to drift back to its 2% goal.
Concerns remain, however, that the economy faces more challenges ahead.
Some of the worries center around the lagged effects of monetary policy, specifically the 11 interest rate hikes totaling 5.25 percentage points that the Fed approved between March 2022 and July 2023. Conventional economic wisdom is that it can take as long as two years for such policy tightening to make its way through the system, so that could contribute to slowness ahead.
Other angst centers around how long consumers can keep spending as savings dwindle and high-interest debt loads accrue. Finally, there’s the nature of what is driving the boom beyond the consumer: Government deficit spending has been a significant contributor to growth, with the total federal IOU at $34 trillion and counting. The budget deficit has totaled more than half a trillion dollars for the first three months of fiscal 2024.
There also are political worries as the U.S. enters the heart of the presidential election campaign, and geopolitical fears with violence in the Middle East and the continuing bloody Ukraine war.
Correction: The price index for personal consumption expenditures rose 2.7% on an annual basis, down from 5.9% a year ago. An earlier version mischaracterized the figures.
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