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The first look at first quarter 2024 economic growth came with a double whammy of surprise. Enough so that many analysts are suggesting the Federal Reserve may need to pivot the pivot it made in December. At the time, the Fed believed inflation was on track to move closer to its 2% target, while the economy was remaining strong and rate cuts could be the next move. Three months of higher inflation data and the weakest gross domestic product (GDP)rate in seven quarters requires a second look. GDP rose 1.6% for the first three months of the year, less than half the 3.4% pace of 4Q23 and almost a full percentage point below expectations. Slower growth might be tolerable for the Fed, but not a 3.7% rise in the core price index. The core price index had been running a steady 2% pace for two quarters, until now.
A deeper look into the quarterly price index reveals most of the price pressure was in January, as was the weakness in spending. Inflation stabilized in February and March but not enough to cool the quarterly data, which the Fed strongly regards. Services costs continue to move higher, rising 3%, led by international airfares, health care and financial services (blame this one on a raging stock market). Goods prices fell 2.4%, the most in a year but still not enough to convince the Fed it is time to bring interest rates down.
The slower pace of growth, once dissected, may not be as bad the headlines look. A wider deficit (more imports, less exports) dragged down growth but ironically helped consumption as consumers bought more imported goods and traveled internationally. Lower federal government spending also subtracted from growth for the first time in two years. The key sources of growth continue to come from personal consumption, up 2.5%, and residential investment, up 14%. Any way to you want to dissect the data, it seems certain the Fed is going to need to talk back its plans for a rate cut this year.
KEY INDICATORS THIS WEEK
Housing – It depends which side of the street you are on to determine how the housing market is performing. Sales of existing homes were down 4.3% in March, the first decline in three months and the biggest monthly drop since October 2022. On the other hand, new home sales surged a surprising 8.8% in March, the largest gain since December 2022. The disconnect comes from a combination of home prices, inventory and mortgage rates. The inventory of existing homes, while 14% higher from a year ago, is still historically low, and prices are almost 5% higher. The supply of new homes, in contrast, is the highest since 2008 and prices are 2% lower from a year ago. Builders are employing a variety of incentives to entice buyers, including price reductions, mortgage rate buy-downs and paying buyers’ closing costs. It is unfortunate that just as the prime home selling season gets underway, the average 30-year mortgage rate rose above 7% this week for the first time in four months.
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