Boy, This Economy Is Hard to Read. Mea Culpa.

Slower inflation was supposed to be a sign that the economy was cooling, all part of the Federal Reserve’s plan for higher interest rates to restore balance to the economy. For a while, things looked on track. But since the middle of January there’s an argument that economic activity is picking up again, despite monetary policy being tighter than at any point in years.

The catalyst is the growing confidence among consumers and businesses alike, ironically driven by the slowdown in inflation the Fed has been working to engineer. Monetary policy remains tight — look no further than the struggles in the automobile and commercial property sectors or affordability challenges for homebuyers — but, for now, there are too many industries showing signs of resilience or acceleration to believe that the central bank’s stance will cause the labor market or economy to unravel.

Frequent readers of mine will note that this is a walk-back of a bias I’ve had for the past few months. I started worrying about a labor-market slump in early November as the unemployment rate rose and worker income growth slowed. Earlier this month, I described the recovery in some cyclical parts of the economy as akin to a “dead cat bounce” that would eventually be swamped by high interest rates; it’s not unreasonable for something like existing home sales to climb when transactions were at their lowest level since 2010.

But over the past couple of weeks, we’ve gotten more evidence, particularly from corporate earnings updates, with company executives reporting resilience or strength in their businesses and showing more confidence in the future.

Perhaps nobody summed up the mood around consumers better than Walmart Inc. Chief Financial Officer John David Rainey when he said: “There was largely a consensus that we were going to enter a recession in the last year. Fortunately, we avoided that. And so, I think overall, we feel a little better about the health of the economy right now.”

Investors Feel the Vibes