The US economic expansion slowed meaningfully over the first three months of 2024, data released on Thursday suggested.
The 1.6% pace, while still healthy, was the most tepid since 2022’s (non)recession and counted as a very large miss. Consensus expected 2.5% from the advance read on headline growth.
It’s fair to call this a surprise. The last update on the Atlanta Fed’s GDPNow tracker was 2.7%, for example, and the domestic macro narrative throughout Q1 revolved entirely around an ongoing economic overheat.
1.6% growth is much closer to trend and could be described as roughly consistent with the “sustainable” pace the Fed’s hoping to engineer in pursuit of price stability.
Personal consumption slowed to a 2.5% pace. Not indicative of “retrenchment,” exactly, but the slowest since Q2 of 2023 and well below consensus all the same.
This would appear to introduce some downside to Friday’s PCE release. At the least, it suggests American spenders became incrementally less incorrigible in Q1.
Spending’s still supported by positive real wage growth and, crucially, tens of billions in monthly interest income from money market funds and high-yield savings, presenting the Fed with a paradox: High rates may be contributing to demand, thereby working at cross purposes with the effort to bring down inflation.
Business spending was respectable. The nonresidential fixed investment line showed a 2.9% increase. Residential investment rose nearly 14%, the best showing since Q4 of 2020. The key final sales to private domestic purchasers line was solid above 3% for the third straight period.
As you can probably surmise from the decent spending prints, the drag on the headline came from trade and inventories.
The figure shows the breakdown by contribution. The drag from trade was the largest in two years.
Now to the unequivocally bad news. Although the headline inflation index matched estimates, core came in warm. And “warm” is a euphemism here.
We knew the quarterly annualized core print would accelerate meaningfully after two straight quarters parked (conveniently) at 2%. But at 3.7%, the actual figure overshot by quite a lot.
That won’t work, to put it politely. And it’ll prompt traders to expect the worst from Friday’s PCE prices update for March: Either the prior months will be revised up, or March’s print will be hot.
All in all, the advance read on Q1 GDP suggested the US economy’s still holding up, even if consumption’s slowing at the margins. It also showed underlying price growth firmed, and that disinflation progress has indeed stalled.
I’m not sure what the right one-word description is, but I know what it isn’t. It isn’t “Goldilocks.” Not today.
The three bears may have found their way home at last ..oh, poor Goldilocks and all her drama!
… and given how long they’ve been fasting, those bears are hungry!
Today’s graphic illustrated this article perfectly. I knew where this article was going to go before I even read the headline.
10 years ago, the concern was the old folks were being pushed out the risk curve as the speculators had free money.
There are always different bells and whistles in an economy. Money market income does feel like free money.
This “old (er) folk” is today (finally) experiencing the world of interest rates as he remembers it to have been in his youth. So the years of saving and planning are panning out as promised.
Regardless of the merit or lack there of of the above…
if and when the Fed LOWERS, will lowering have an inordinate or unanticipated
effect?
Easing now may soften a landing for many. I tend to think that this may show currently why the 80s wound up being so bad.
But the Fed is scared to have interest rates act like a yo-yo.
2% inflation may have been a happy accident historically or you may need to slow to no growth economy.
MMT alleges that inflation could be fought with higher interest rates and higher taxes. Applying taxes in our political system seems to be a nonstarter. Some fools used to lower taxes into inflation.
STAGFLATION
Or we could raise taxes and lower interest rates. Not to sound like a Marxist, but the higher interest rates are affecting the working man and those lower in the food chain. Lower taxes and higher interest rates only helps the rentier class at this point.
Scanning the advance GDP report, some interesting (to me anyway) things. All %s are QOQ change annualized, in 2017 dollars (from Table 1 and calc’d from Table 3)
– Increase in non-residential fixed investment +5.3% led by software +11.3%
– Increase in gross residential fixed investment, +13.9%
– Decline in personal goods consumption -0.4% led (down) by motor vehicles -9.9%, increase in services +4.0% led (up) by healthcare +5.5%
– Increase in imports,+7.2% led by services, and slower increase in exports, 0.9%.
– Decline in Federal spending esp defense -0.6% and slower state and local spending +2.0%
In contribution to pct change in GDP (table 2), comparing 1Q to 4Q, largest negative swings were goods (flipped from +ve to -ve), net exports (ditto), and government spending (smaller +ve than last qtr) while positive swings were fixed investment (larger +ve than last qtr) and services (larger +ve). Inventories were about as -ve as last qtr.