GDP report shatters dreams of soft landing
The pace of economic growth in the first three months of this year was much slower than anyone expected, and inflation was much higher.
The report suggests that the soft-land scenario of strong growth and steadily declining inflation is dead. We are currently considering the following: Possibility of non-landing or hard landing.
Gross domestic product (GDP) is the government’s official economic indicator. A modest pace of 1.6% per year In the first quarter. This is a sharp slowdown from the 3.4% pace in the fourth quarter of last year, and is a reminder that the pace of economic growth can change suddenly and unexpectedly.
consensus The forecast was for a growth pace of 2.5%.–Many on Wall Street wonder if that amount is too low. The Atlanta Fed’s GDP Now ended last week at 2.9%, up from 2.7% in Thursday’s release the night before. A Philadelphia Fed survey of professional forecasters found economic growth at 2.1%.
To see how far the predictions were off, let’s take a look at the range of the Econoday survey’s predictions. The lowest of these was 1.7 percent, one notch higher than the result. In other words, No professional forecaster expected 1.6% growth in the first quarter..
Bad news becomes more bad news
The market pattern of recent months has been both bad news for the economy and good news for the market. The logic is that any signs of economic weakness could lead to rate cuts being brought forward or, once they start, cutting rates faster. However, on Thursday, Bad news for the economy was also bad news for the stock market..
One of the reasons is that the main drags on GDP are: Trade and inventory volatile categories. Export growth was weak and import growth (subtracted from GDP calculations) was strong. Despite signs of economic recovery around the world, exports rose by just 0.9% in the quarter. It’s a good thing that the U.S. economy has bounced back from the pandemic better than any other country, but it’s a reminder that weakness overseas could weigh on U.S. growth.
Export growth was evenly split between goods (+0.9%) and services (+1.0%).It is very likely that dollar strength Exchange rates against world currencies were part of the problem here, making American goods and services unaffordable to foreign consumers. Global geopolitical turmoil may also have been a drag on export demand. Finally, the Biden administration Holding back on strengthening energy export capacity Many Americans are likely starting to bite, and unless leadership changes in the executive branch in November, it will weigh on growth for years to come.
Inventories increased by only $35.4 billion in the January-March period, much lower than expected. This shortfall caused GDP to decline by 0.35% in the quarter.
As Harvard University’s Jason Furman noted in a post on Thursday, Wall Street was willing to ignore the weakness in trade and inventories. This is because these are “non-inertial items”. Barring a major recession, Large fluctuations in inventory tend to reverse Even in subsequent quarters. Exports are uncorrelated with changes in the domestic economy and should not be taken as a predictor of growth for the rest of the year.
GDP grew at an annualized rate of 1.6% in the first quarter, slightly lower than expected.
However, much of the slowdown was in non-inertial items such as inventories (-0.35pp) and net exports (-0.86pp). A better signal for final sales to domestic private buyers was 3.1%. pic.twitter.com/bIv8s5yMtA
— Jason Furman (@jasonfurman) April 25, 2024
Underlying demand still looks strong
There were signs of resilience in the GDP report. Starting with trade, Imports increased significantly by 7.2%, indicating high domestic demand. Domestic final sales to private buyers – the best indicator of the health of the real economy – grew at a solid 3.1% pace. This is slightly lower than the previous quarter’s 3.4% pace and faster than the 3.0% growth in the third quarter of last year.
Personal consumption spending continued to grow at a healthy (albeit slightly weaker than expected) rate of 2.5%. Spending on contracted products Mainly due to the slump in durable goods, it was 0.4%, the first negative decline since the third quarter of 2021. car sales This was a big hindrance here. This could also be a sign of consumer fatigue as inflation and rising gas prices crowd out other spending.
Residual seasonality may also be at play here. Recall that retail sales were low in January. Additionally, last year’s auto workers’ strike left some dealers short on inventory for much of the first quarter. Expectations of interest rate cuts in the first half of this year (now extinguished) may have motivated some consumers to delay purchases until they can get better financing terms.
Spending on services is at its highest since Q3 2021, driven by healthcare (where everyone is taking a ton of weight loss pills) and financial services (where a booming market is leading to higher fees). There was an increase inthis is Service spending increases for third consecutive quarter.
Fixed investment increased by 5.2%, enough to boost overall growth by nine-tenths of a percentage point. This was driven by his 13.9%. Rapid increase in housing investment. Housing investment has now expanded for three consecutive quarters, indicating strong demand but limited supply in the existing home market.
Non-residential investment increased by 2.9% despite a decline in investment in business structures. This decline in structural investment reflects the fact that: Spending was brought forward with federal aid. In previous quarters. Barring new government action, this trend is likely to remain weak in the coming quarters.
Although investment in non-residential buildings declined, other business investments remained strong. Capital investment he increased by 2.1%; Intellectual property investment increased by 5.4% (Probably AI bounce).
Inflation remains raging
What surprised me most about this report was Strength of personal consumption expenditure (PCE) inflation. Analysts should have been able to figure this out pretty well, since we already have the January and February PCE Price Index, and the March Consumer Price Index and Producer Price Index reports. The consensus forecast for core PCE inflation was about 3.4% annually. The Philadelphia Fed’s survey of professional forecasters, which is now quite old, showed headline PCE up 1.9% and core up 2.1%.
Instead, the government said PCE inflation was 3.4% and core inflation was 3.7%.. This means either that tomorrow’s March PCE report will have a significant upward revision to the January and February numbers, or that the March report will be significantly higher than the corresponding portions of his CPI and PPI reports. may indicate. In any case, the higher-than-expected numbers likely delay any Fed rate cuts until next year at the earliest, making it more likely that the Fed will raise rates.
The worst-case scenario is that inflation is too high for the Fed to cut rates, while growth remains sluggish or turns negative. This report raises that risk, but Basic domestic demand statistics suggest this should not be the base case. The economy is still growing and inflation remains stubborn.
In other words, there is no prospect of landing.
