Main Street Macro: How to catch a moving target

Change is a constant theme on this blog. That’s not only because the Main Street economy is always in motion, which it is, but also because big, long-in-the-making changes have begun rapidly shifting the economic landscape. For business leaders and decision-makers, it can be hard to keep up, let alone catch changing trends.

There are three steps to catching this moving target.

Step 1: Know what’s changing

Last week, Federal Reserve policymakers held their regular March meeting to determine their next action on interest rates. Instead of making a highly anticipated rate cut, they held short-term rates at the current range of 5.25-5.5 percent.  

On the face of it, the Fed’s action–or inaction–looks like no change. Yet, there’s more than meets the eye in the Fed holding rates at over a two-decade high.

As a group, Fed policymakers are much more bullish this month than they were in December. They raised their median projections of GDP growth this year to 2.1 percent, much stronger than their December forecast of 1.4 percent. They also anticipate a stronger labor market, with unemployment ending the year at 4 percent instead of 4.1 percent.

Most importantly, Fed policymakers project a key measure of inflation–the core PCE Price Index–of 2.6 percent in 2024, higher than the 2.4 percent they projected three months ago.

The PCE–the Personal Consumption Expenditures Price Index–measures what people pay for goods and services in the United States. Core PCE, which strips out food and energy costs, is the Fed’s favored inflation gauge and plays prominently into monetary policy decisions such as setting interest rates.

The fact that the central bank thinks PCE inflation will remain higher than it once thought is noteworthy in itself. Even more attention-getting is that members of the Fed’s policymaking committee are sticking with their plan to cut rates this year by the same amount despite higher expected inflation.

The Fed is signaling that it believes an economy can grow, produce steady job gains, and reduce inflation (though more slowly than previously thought). This is a far cry from the pain that the Fed suggested would be hitting Main Street last year.  It sounds like economic nirvana, the equivalent of having your cake and eating it, too.

Step 2: Keep looking ahead

This week, we’ll get a lot of economic data, some of which might challenge the Fed’s rosy picture. 

We’ll get data on the housing market, which seems to be impervious to higher interest rates. We’ll also get a report on consumer spending on durable goods, which will tell us whether consumers are still purchasing big-ticket items such as refrigerators and furniture, and a fresh take on consumer sentiment.

The week ends with the headliner of core PCE inflation, which will be released Friday. February data from the Consumer Price Index and Producer Price Index, which tracks wholesale prices, suggests that last month’s PCE Index could be higher than economists previously predicted.

By the end of the week, we should have a good idea of how well the economy and Main Street are standing up to higher-for-longer interest rates, and whether more change is afoot. 

Step 3: Focus on the worker

The economy writ large isn’t the only thing that matters to business leaders. Changes in the workplace have also been profound over the last four years. For the first time in history, five generations of people are active in the workforce, and remote and hybrid jobs have arrived with a bang. Workplace change is here, and it’s different from the change we’ve experienced in the past.

One way business leaders measure the effect of change on their employees is through engagement. Engagement measures the emotional state of mind that prompts people to do their best work and sustain that elevated level of performance.

The ADP Research Institute has been tracking worker engagement across the globe since 2015. In the latest issue of our quarterly publication Today at Work we examine worker engagement based on survey responses from 28,000 people in 28 countries. In spite of–or maybe because of–the changing economic landscape, worker engagement is on the rise.

My take

My birthday falls during spring break season, and as an adult I’ve maintained the habit of taking time off with my family at this time of year. Taking a break during the transition between winter and spring tends to sharpen my awareness of change at this time of year.

Regular readers know we’ve been busy cataloging workplace change. In the past few weeks, we’ve examined teacher pay, worker stress, and a number of other dynamics.

The through line through all of this research is our focus on people. Consumers drive the economy and workers help businesses reach their goals. When it feels like economic targets are continually zig-zagging, paying close attention to the people who drive that movement is the best way to keep up with what’s really happening.