Early predictions show first quarter economic growth picking up, but a little-known indicator of future growth, the Conference Board’s Index of Leading Economic Indicators (LEI) in March highlighted the danger that high interest rates hold for future growth.
The LEI’s year-over-year growth remains negative, but is on an upward trend
“Overall, the Index points to a fragile—even if not recessionary—outlook for the U.S. economy. Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.
And the Atlanta Federal reserve boosted their GDPNow estimate of Q1 growth once again.
“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 2.9 percent on April 16, up from 2.8 percent on April 15, after the increase of first-quarter real personal consumption expenditures growth and first-quarter real gross private domestic investment growth.”
We know why elevated interest rates pose a danger to growth. They hurt the manufacturing and housing sectors, for starters, that rely on investment spending to build new equipment or new housing, which is directly affected by the cost of money—and there are 7 percent fixed-rate mortgages for homebuyers and owners wanting to refinance.
Manufacturing is just beginning to come out of the doldrums. The Institute for Supply Management’s latest purchasing managers index for US manufacturing, a monthly survey that gauges economic activity, rose more than expected in March to a reading of 50.3, the first time the index has registered expansion since September 2022.
And Existing-home sales slipped in March, according to the National Association of Realtors®. Among the four major U.S. regions, sales slid in the Midwest, South and West, but rose in the Northeast for the first time since November 2023. Year-over-year, sales decreased in all regions.
“Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves,” said NAR Chief Economist Lawrence Yun. “There are nearly six million more jobs now compared to pre-COVID highs, which suggests more aspiring home buyers exist in the market.”
The Federal Reserve’s Beige Book, based on anecdotal evidence from the 12 districts collected over the past six weeks, was favorable in that it showed softening of activities that boost inflation.
“Economic activity increased slightly, on balance, since early January, with eight Districts reporting slight to modest growth in activity, three others reporting no change, and one District noting a slight softening. Several reports cited heightened price sensitivity by consumers and noted that households continued to trade down and to shift spending away from discretionary goods.”
So maybe the Fed’s credit restrictions are slowing consumer spending, but a far greater danger is that it penalizes producers that make the things businesses and consumers buy, making them more costly, thereby keeping prices higher.
The Conference Board’s LEI best illustrates the problem. The Fed’s efforts to lower inflation are stymied by its own inaction on bringing down interest rates, which are continuing to climb in some markets.
The LEI has stalled, fluctuating at a breakeven point between growth and recession. It decreased by 0.3 percent in March 2024 to 102.4 (2016=100), after increasing by 0.2 percent in February. Over the six-month period between September 2023 and March 2024, the LEI contracted by 2.2 percent—a smaller decrease than the 3.4 percent decline over the previous six months.
The best way to lower the price of things is to make more things, which means in part lowering the cost of money to make them.
Harlan Green © 2024
Harlan Green on Twitter: https://twitter.com/HarlanGreen
No comments:
Post a Comment