Economic output hit its highest level in seven months in January as inflation eased, underscoring how the soft landing scenario investors are hoping for could be within reach.
S&P Global's flash US composite PMI, which captures activity in both the services and manufacturing sectors, came in at 52.3 in January, up from 50.9 in December and better than the 51.0 that had been expected by economists.
S&P reported business confidence reached a 20-month high while prices charged, a measure of inflation, rose at its slowest pace since May 2020. The manufacturing index saw the largest increase with a reading of 50.3 up from 47.9 the month prior. The services component of S&P's report showed the index registered 52.9 this month, up from 51.4 in December.
Any reading above 50 for these indexes represents expansion in the sector; readings below 50 indicate contraction.
“An encouraging start to the year is indicated for the US economy by the flash PMI data, with companies reporting a marked acceleration of growth alongside a sharp cooling of inflation pressures," Chris Williamson, the chief business economist at S&P Global Market Intelligence, said in the release.
Wednesday's reading is the latest in a string of positive economic data during the first month of the year as investors closely watch to see if Fed can achieve its vaunted "soft landing," where inflation returns to the 2% goal without an economic downturn.
Hard economic data of late has supported this thesis, with December retail sales showing consumer spending finished 2023 in a better position than many economists feared. Building permits rose by more than expected in December, too. All while the labor market hasn't shown severe signs of cooling off, with the latest reading of weekly jobless claims hitting its lowest level since September 2022.
The recent positive news on economic growth comes ahead of the release of the next Personal Consumption Expenditures (PCE) index, the Fed's preferred inflation gauge, on Friday.
Economists expect annual "core" PCE — which excludes the volatile categories of food and energy — to have clocked in at 3% in December. Over the prior month, most economists expect "core" PCE to come in at 0.2%.
If projections are right and inflation continues to fall while the economy grows, that's a bullish setup for not only the economy but also stocks, per Renaissance Macro's head of economics Neil Dutta.
"Growth is up and inflation is down," Dutta wrote in a note to clients on Wednesday. "The former puts a ceiling on how many cuts the Fed will do while the latter means the Fed still ends up cutting. [That is a] very good scenario for equity markets."
Josh Schafer is a reporter for Yahoo Finance.
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