The initial estimate of first quarter 2024 Gross Domestic Product (GDP) growth was lower than expected, causing financial markets to panic, even though economic growth is better than the initial estimate is reporting.
The lower GDP estimate happened because Americans bought more imports than sold exports overseas. So consumers are still spending, which is the mainstay of growth, and even continued to invest in factories and infrastructure.
First quarter GDP growth was 1.6 percent, below expectations, after 3.4% growth in Q4 and 4.6% growth in Q3 2023.
Why the decline in Q1? Imports were higher that subtract from GDP and product inventories were down, as nobody was restocking their shelves yet, which is common while wholesalers and retailers wait to see the demand for their products in the New Year. But consumer spending held up (+2.5%).
That’s because the job market is still hot, with jobless claims in the latest week down to 207,000 from the more average 215-220,000. But the markets are seeing danger signs that the Fed may be less likely to lower interest rates.
Why? The product shortage is raising inflation as consumers must pay more because of the depleted inventories.
“The increase in real GDP primarily reflected increases in consumer spending, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by a decrease in private inventory investment, said the US Bureau of Economic Administration (BEA). Imports, which are a subtraction in the calculation of GDP, increased.”
The U.S. trade deficit in goods widened 1.7% to $91.8 billion in March, according to the Commerce Department’s advanced estimate released Thursday. That’s the largest deficit since last April.
Wholesale inventories fell 0.4% in March after a 0.4% gain in the prior month. Nonauto retail inventories fell 0.1% after a 0.3% rise in February.
Inflation has stalled, as there is now a supply shortage because inventories are not being replenished. But that will be cured soon enough as producers gear up production once again.
The price index for gross domestic purchases increased 3.1 percent in the first quarter, compared with an increase of 1.9 percent in the fourth quarter, said the BEA. The personal consumption expenditures (PCE) price index increased 3.4 percent, compared with an increase of 1.8 percent. Excluding food and energy prices, the PCE price index increased 3.7 percent, compared with an increase of 2.0 percent.
In fact, there’s a drop in exports because of the strong US Dollar in relation to other currencies, which makes exports more expensive. And that’s due to the sky-high interest rates the Fed is not yet reducing.
But despite soaring mortgage rates, pending home sales rose 3.4% in March from the previous month that reflect transactions where the contract has been signed for the sale of an existing home, but the sale has not yet closed. It’s another sign that consumers are still spending.
“March’s Pending Home Sales Index – at 78.2 – marks the best performance in a year, but it still remains in a fairly narrow range over the last 12 months without a measurable breakout,” said NAR Chief Economist Lawrence Yun. “Meaningful gains will only occur with declining mortgage rates and rising inventory.”
The temporary inflation boost what is worrying the markets, but Treasury Secretary Yellen was reassuring markets today that it is temporary.
Thursday morning’s GDP report showed the Fed’s preferred measure of inflation, core PCE, rising to 3.7% in the first quarter of 2024, up sharply from 2% in the prior period that is mainly due to lagging rental rates based on annual rental contracts that aren’t yet reacting to growing supply of rental housing.
“When we look at the market for new rentals or for rents on single-family houses, what we see is those rents have stabilized, in some cases fallen,” Yellen said. “Ultimately that is what, over time, will govern increases” in the inflation statistics.
So it’s really a temporary supply shortage of everything this time of year that has boosted inflation, and the markets will soon realize this.
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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