The case for rate cuts this summer continued to weaken as this week’s economic data painted a scene of stubborn inflation against the backdrop of defiant consumer demand. On Thursday, we got our first look at Q1 GDP, which downshifted to a 1.6% annualized pace. Q1’s print was lower than all 69 estimates submitted to Bloomberg, and on first take, it appears that the economy is finally giving way to the inevitable gravity of higher rates. Peeking under the hood, however, the GDP components tell a different story. The overall soft GDP reading can be attributed to a significant drag from trade and slower inventory growth. Net exports subtracted 0.86 percentage points from headline growth and without that drag growth would have printed in line with consensus. Business inventories also weighed on headline growth. Although real private inventories rose in Q1, it was at slower pace compared to the previous quarter, resulting in a 0.35 percentage point drag on the headline. Stripping out net exports, inventories and government investment, real final sales to domestic private purchasers rose at a 3.1% annualized rate, signaling a still healthy economy.
To this point, consumers remain unfazed by high rates and inflation as personal consumption expenditures grew at a solid 2.5% pace. Consumers continued to direct their spending toward services, which came in at a blistering 4% annualized growth rate. Spending was weaker for big-ticket durable goods items, but the splurge on services was more than enough to offset this.
A disconcerting detail within the GDP report was a hot core PCE deflator reading, which accelerated to a 3.7% annualized rate in Q1. That said, the March personal income and spending report released today revealed the surprise jump in core PCE inflation was due to more inflation in January, and not a significant pickup late in the quarter. Indeed, price growth was front-loaded in Q1 with a monthly pattern of 0.50%, 0.27% and 0.32% from January to March, respectively. That being said, year-over-year core inflation still came in hot at 2.8%. The hotter-than-expected inflation reading raises further questions on the path of monetary policy. Markets are currently pricing between one and two rate cuts with the risks skewed to the downside. As discussed in our April Fed Flashlight, stubborn inflation and resilient economic activity through the first few months of the year have left the FOMC little reason to ease policy in the near term. In addition, a chorus of Fed officials, which tellingly include a number of “doves,” have indicated that there is no hurry to cut rates at this time.
Continued patience from the Fed may be appropriate as consumers have demonstrated in this cycle that they will continue to spend even in the face of higher interest rates and inflation. Nominal personal spending improved by a better-than-expected 0.8% in March. On an inflation-adjusted basis, real spending has risen 0.5% in back-to-back months. Real disposable personal income rose 0.2% over the month, continuing to help firm up consumer spending. Households also remain comfortable dipping into savings to drive spending as the personal saving rate slid to 3.2% in March, the lowest since October 2022. A strong consumer isn't necessarily a bad thing for the Fed, unless spending continues to feed into stronger-than-desired inflation pressures. Price growth was firm in Q1, placing more emphasis on Q2 to determine the eventual start of Fed easing.
The March durable goods report was in line with consensus as orders rose 2.6% over the month. Taking volatile aircraft orders out of the equation, orders were up a more modest 0.2% over the month. The underlying order details indicate a still-hesitant demand environment. Core capital goods orders rose in March but were down slightly for Q1 as a whole. Nearly all major orders categories saw an uptick in orders in March, but most gains were modest. Ultimately, the capex environment remains hindered by elevated borrowing costs and increased uncertainty around the path of Fed policy and the economy generally.
The housing market seems to be weathering higher interest rates with greater success than the manufacturing sector. Residential investment rose at a 13.9% annualized pace in the Q1 GDP report, fueled by single-family housing construction and an increase in brokers’ commissions. A strong showing for new home sales in March provided further encouragement as sales jumped 8.8% to a 693K-unit pace. March’s print was a strong rebound from a disappointing February print, which was revised lower. First quarter sales averaged 667K units, which represents a 4.5% improvement from the pace averaged in Q4 2023. The upturn in new home sales despite higher interest rates largely reflects builders' ability to offset eroding housing affordability conditions through price discounts, mortgage rate buy-downs and other incentives. That said, the boost in sales may be a result of homebuyers trying to front-run rising mortgage rates, which breached 7% in April, reaching 7.2% this week, according to Freddie Mac. If rates continue to climb, we may witness more buyers being forced to the sidelines in the coming months.
This Week's State Of The Economy - What Is Ahead? - 09 June 2023
Wells Fargo Economics & Financial Report / Jun 14, 2023
An unexpected spike in jobless claims is a sign that cracks are forming in the labor market. Higher mortgage rates look to be hindering a housing market rebound.
This Week's State Of The Economy - What Is Ahead? - 01 December 2023
Wells Fargo Economics & Financial Report / Dec 05, 2023
U.S. data released this week indicates the economic expansion remains alive even as inflation continues to slow. The year-ago rates of headline and core PCE inflation were the lowest since March 2021 and April 2021, respectively.
This Week's State Of The Economy - What Is Ahead? - 21 October 2020
Wells Fargo Economics & Financial Report / Oct 21, 2020
Mobility is continuing to trickle lower in several major developed market economies. The U.K., France, Italy and Canada have all seen some further modest declines in retail/recreation visits.
This Week's State Of The Economy - What Is Ahead? - 08 April 2022
Wells Fargo Economics & Financial Report / Apr 11, 2022
Wednesday\'s release of the FOMC minutes stirred things up as comments showed committee members agreeing that elevated inflation and the tight labor market at present warrant balance sheet reduction to begin soon.
This Week's State Of The Economy - What Is Ahead? - 21 February 2020
Wells Fargo Economics & Financial Report / Feb 22, 2020
Minutes from the January 28-29 FOMC meeting indicate the coronavirus will not push the Fed to cut interest rates, and for the most part housing and manufacturing survey data this week supported that view.
This Week's State Of The Economy - What Is Ahead? - 28 June 2024
Wells Fargo Economics & Financial Report / Jul 04, 2024
According to the Federal Reserve\'s preferred gauge, core inflation cooled to its softest pace in more than three years in May against a backdrop of measured consumer spending and still-strong personal income.
This Week's State Of The Economy - What Is Ahead? - 14 October 2020
Wells Fargo Economics & Financial Report / Oct 14, 2020
The global mobility playing field is equalizing. Major European countries such as Germany and France have seen a slowdown in recent weeks, leaving them right in line with the United States relative to the January baseline.
This Week's State Of The Economy - What Is Ahead? - 13 August 2021
Wells Fargo Economics & Financial Report / Aug 19, 2021
The general outlook remains positive as households have accumulated over $2T in excess savings on their balance sheets and net worth has risen across all income groups.
This Week's State Of The Economy - What Is Ahead? - 29 July 2022
Wells Fargo Economics & Financial Report / Jul 31, 2022
Unlike the local temperatures, data released this week showed U.S. economic growth modestly declined in Q2.
This Week's State Of The Economy - What Is Ahead? - 18 August 2023
Wells Fargo Economics & Financial Report / Aug 23, 2023
The FOMC meeting minutes acknowledged the economy\'s resilience and continued to stress the Committee\'s resolve to bring inflation back down toward its 2% goal.
