Yellen: Subpar U.S. growth may get revised up, inflation will ebb


U.S. economic growth for the first quarter could be revised higher and inflation will ease to more normal levels, Treasury Secretary Janet Yellen told Reuters on Thursday after a clutch of "peculiar" factors held the economy to its weakest showing in nearly two years.

"The U.S. economy continues to perform very, very well," Yellen said in an interview with Reuters, responding to the Commerce Department's substantially weaker-than-expected initial estimate for U.S. gross domestic product from January through March. The report showed the economy grew at a 1.6% annualized rate - below the 2.4% estimated by economists and less than half the pace in the fourth quarter of 2023 - thanks to substantial drags from trade and private inventories.
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"What I focus on most is the strength of consumer spending and investment spending," Yellen said. "Those two elements of final demand came in in line with last year's growth rate ... so this is the underlying strength of the U.S. economy that showed continuing robust strength and an economy firing on all cylinders."
"The headline figure was off a little bit but for reasons that are peculiar and not really indicative of underlying strength."
Indeed, a number of private economists said the GDP data likely overstated any weakness in an economy that had grown at above the rate most see as its potential for nearly two years, despite aggressive interest rate hikes over that span by the U.S. Federal Reserve aimed at quashing inflation.

The GDP report also confirmed earlier evidence that progress on lowering inflation took a hit in the first three months of the year. Yellen, however, said she does not see that as indicating that other areas of the economy - the job market in particular - need to weaken in order to return inflation to the Fed's 2% target.
"The fundamentals here are in line with inflation continuing back down to normal levels," Yellen said.

"I don't see any reason why unemployment needs to rise to bring inflation down," she said. "To me the data says we are on a downward path for inflation."
Other data on Thursday in fact showed little evidence of the labor market weakening. New claims for unemployment insurance last week dropped to a two-month low and the rolls of those continuing to draw benefits after their first week of aid dropped to the lowest since mid-January in the week ended April 13.

One of the most important questions for the economy in 2024 is whether the surge in worker productivity that occurred in 2023 will prove to be both real and durable.

The answer will determine whether last year's combination of robust growth and falling inflation can continue, driving Americans' incomes higher and giving the Federal Reserve a green light for interest rate cuts.

  • While some Fed officials are skeptical that the productivity surge will continue, there are some signs that it is fueled by economic fundamentals facing corporate America — particularly a scarcity of workers — in which case it could have room yet to run.

Productivity is the dark matter of economics: a tremendously important concept that is not deeply understood at the microlevel.

  • Labor productivity is a residual of how much economic output is generated for every hour of work.
  • Measurements are volatile and imprecise, and economists don't claim to know with certainty what is happening at the level of corporate decision-making that causes productivity to rise or fall.

 With the unemployment rate below 4% for more than two straight years and the baby boomer generation retiring from the workforce, companies may have a greater impetus than in the recent past to find ways to squeeze more output out of their workforce.

  • That can include capital investments — relying more on software and machinery — or changes to training, work processes, or how individual workers and employers match with each other.
  • In effect, worker scarcity creates upward pressure on wages, which in turn puts pressure on companies to achieve productivity gains commensurate with those higher wages.

"Right now most companies don't feel like they have anywhere near the pricing power that they had a year or two ago," Rich Lesser, global chair of Boston Consulting Group, tells Axios. "And yet wages continued to go up 3 or 4%."

  • "I think that puts a productivity challenge into the mix. It also puts more pressure on innovation and finding new ways to drive growth."
  • For example, he recently met with an executive for a quick-serve restaurant chain in California, who intends to grapple with a new $20 per hour minimum wage there by cutting staffing and adding checkout kiosks.

"To accelerate the productivity engine, technology is often the fuel, but labor and wage pressures are the spark," says Lesser. "Right now we have both."

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