This week's economic data largely reinforced existing economic growth patterns. Consumer momentum remains largely intact, inflation continues to inch back down, albeit at a slower pace, and rate-sensitive sectors stayed in a holding pattern. Perhaps most encouraging were signs that the economy entered 2024 on stronger footing than initially observed. The Commerce Department released the latest revisions to Q4 GDP, bringing up growth to a 3.4% annualized rate from the previous 3.2% estimate (chart). Among the revisions, nonresidential spending growth jumped to 3.7% from 2.4% on upward revisions to private nonresidential construction outlays. Booming manufacturing construction has propelled structures investment, a trend we highlight in a recent special report. Government outlays were also revised higher, but the leg-up in consumer spending, specifically services outlays, was the primary driver of the upward revision to GDP. Although sustained consumer spending in the sector is on its face an encouraging sign for growth, it may be preventing a sustained cooling in services prices.
Illustrative of this point, the February personal income & spending report painted a picture of a defiant consumer that continues to splurge on services. Nominal spending rose 0.8%, the largest monthly gain in a year and a half, and once adjusted for inflation rose a still-sturdy 0.4%. But it was a 0.6% jump in real services outlays that stole the show. This was the largest jump in real services spending since the summer of 2021 when consumers were still flush with pandemic-era savings. The surge in services spending is another headache for policymakers. As long as consumers keep splashing out in the service sector, the businesses that provide these services have no incentive to ease up on pricing. To that end, the inflation rate for services less housing, or "super-core" inflation, came in at 3.3% year-over-year, but the three-month annualized rate of 4.5% points to near-term upward momentum (chart). Although the annual rate of the core PCE deflator, the Fed's preferred measure of inflation, came in at 2.8% year-over-year with a slightly smaller-than-expected monthly rise of 0.3% in February, services prices are no longer cooling as they were a few months ago.
All of that being said, a few potential roadblocks lay in the path of consumers. Income growth has moderated as of late, and household pessimism around future income growth is building, despite an improved view of the current jobs market. Personal income rose 0.3% over the month in February, but once adjusting for inflation and stripping out taxes paid, real disposable income slipped 0.1%. Waning income growth is weighing on consumer confidence, and we ultimately anticipate a slower pace of economic growth this year as households have become increasingly dependent on income to feed their spending habits.
The refreshed GDP report also shed light on economy-wide corporate profits. Pre-tax profits came in stronger than expected, rising 4.1% over the quarter on a non-annualized basis. In dollar terms, profits jumped by $105 billion, the largest quarterly gain since Q2-2022. Steady profit growth has afforded firms with the means to expand and hire, and while firms have generally reduced their capex demand, the strong end to 2023 suggests businesses entered 2024 on solid financial footing.
The February durable goods report provided some fresh manufacturing data as new orders rose 1.4% over the month. This was only a partial rebound from January’s weakness and is consistent with a manufacturing sector flying at stall speed. Core capital goods orders excluding defense and aircraft rose 0.7% following two monthly declines, but the current interest rate environment continues to weigh on capex demand. Although there are early signs of recovery in the production data, we don’t expect a sustained manufacturing recovery to take hold until the Fed begins to ease policy in the second half of the year.
High interest rates continue to keep a firm grip on the housing sector. February’s new home sales report was a dud as sales inched down 0.3% to a 662K-unit annualized pace. February’s slip was likely owed to an uptick in mortgage rates during the month. Additionally, the relative improvement in available existing homes also may have cut into new home sales during the month. That said, the growth trend for new home sales remains in place, with sales up 5.9% on a year-over-year basis. Abundant supply is also helping to dull price growth and attract buyers to the new home market; however, affordability remains a major constraint for homebuyers. Within the resale market, affordability issues have been further compounded by resurgent home price growth. The S&P CoreLogic Case-Shiller National Home Price Index (HPI) rose to 6.0% on a year-over-year basis in January, and the index is now about 1% above its previous peak set in June 2022. Despite the persistent rise in home prices, buyers appear to be re-entering the market amid incrementally improving supply. The NAR Pending Home Sales Index bounced back in February as contract signings rose 1.6% over the month. The move portends further improvement in existing home sales, which are already off to a strong start in 2024.
This Week's State Of The Economy - What Is Ahead? - 28 May 2021
Wells Fargo Economics & Financial Report / Jun 08, 2021
This week\'s light calendar of economic reports showed supply chain disruptions tugging a little at economic growth.
This Week's State Of The Economy - What Is Ahead? - 13 December 2024
Wells Fargo Economics & Financial Report / Dec 16, 2024
Prices were in focus this week with reports delivering the last key data before the FOMC\'s next meeting on December 17-18. The November readings on consumer and producer prices suggested that overall inflation remains stubbornly high.
This Week's State Of The Economy - What Is Ahead? - 27 January 2023
Wells Fargo Economics & Financial Report / Jan 28, 2023
Real GDP expanded at a 2.9% annualized pace in Q4. While beating expectations, the underlying details were not as encouraging. Moreover, the weakening monthly indicator performances to end the year suggest the decelerating trend will continue in Q1.
This Week's State Of The Economy - What Is Ahead? - 17 September 2021
Wells Fargo Economics & Financial Report / Sep 23, 2021
While we were picking up tree limbs from the yard, data released this week generally showed a stronger economy in August than many expected in the wake of surging COVID cases.
This Week's State Of The Economy - What Is Ahead? - 28 August 2020
Wells Fargo Economics & Financial Report / Aug 26, 2020
After a revised look at GDP this week suggested the second quarter may not have been quite as bad as first estimated, attention shifts to the current quarter.
This Week's State Of The Economy - What Is Ahead? - 10 November 2023
Wells Fargo Economics & Financial Report / Nov 16, 2023
Sometimes, the impact of higher rates is quite obvious, such as the series of bank failures that occurred earlier this year.
This Week's State Of The Economy - What Is Ahead? - 02 October 2020
Wells Fargo Economics & Financial Report / Sep 29, 2020
In what was a jam-packed week of economic data, the jobs report, prospects of additional fiscal stimulus and the president’s positive COVID-19 test result commanded markets’ attention.
This Week's State Of The Economy - What Is Ahead? - 18 March 2022
Wells Fargo Economics & Financial Report / Mar 21, 2022
it was a big week for economic news as the Astros allowed the TWINS of all teams to sign Carlos Correa to the type of short-term deal that the Astros have historically been open to.
This Week's State Of The Economy - What Is Ahead? - 20 September 2019
Wells Fargo Economics & Financial Report / Sep 21, 2019
The Federal Reserve reduced the fed funds rate 25 bps this week, continuing to cite economic weakness overseas and muted inflation pressures.
This Week's State Of The Economy - What Is Ahead? - 06 March 2020
Wells Fargo Economics & Financial Report / Mar 07, 2020
An inter-meeting rate cut by the FOMC did little to stem financial market volatility, as the number of confirmed COVID-19 cases continued to climb.
