It’s time to catch our breath. Wars and protests can unsettle economies, but much of the economic uncertainty is for more mundane reasons.
The last few weeks have unsettled the financial markets, to say the least. The DOW and S&P are at record heights, but so are mortgage rates.
The initial Q1 2024 GDP growth estimate had shrunk to 1.6 percent vs. 3.6 percent in Q4 2023. Inflation has also been spiking in Q1, which has rattled the Fed so much that Fed Chair Powell had to reassure markets the Fed is done with raising interest rates but is taking a wait-and-see approach on when to cut those rates.
Inflation surprised to the upside in the first quarter, with the core personal consumption expenditures price index going up at a 3.7% annual rate after two straight quarters at a 2% rate of increase.
As if to highlight said uncertainties, the Atlanta Fed’s GDPNow forecast project is now showing a huge jump in Q2 GDP to 4.2 percent! How can that be when most economists are predicting no more than 2 percent Q2 growth?
Part of the answer is conflicting signals in the first quarter. Growth slowed because companies didn’t restock their shelves after a gangbuster holiday season for shoppers, even though consumers continued shopping in the New Year.
And businesses typically raise prices at the same time as most employees get their annual pay raises in January. The result was that soaring labor costs got ahead of things being produced, hurting labor productivity and further depressing those optimists that hoped inflation would continue to decline.
So Q2 is shaping up as catch up time. More things will be produced to increase supplies and help restock shelves, which will boost economic growth. That’s why economists are predicting better Q2 growth.
For starters, the Atlanta Fed’s GDPNow model estimate for real GDP growth I like to report (seasonally adjusted annual rate) in the second quarter of 2024 is 4.2 percent on May 8, up from 3.3 percent on May 2. Both consumer spending and real personal consumptions expenditures are growing; real personal consumption expenditures growth (consumer spending) is up from 3.1 to 3.9 percent and second-quarter real gross private domestic investment growth (capital expenditures) from 4.1 percent to 6.8 percent.
This is while the annual inflation indicators used by economists are at or close to 2 percent for both wholesale and retail goods and services. Inflation will probably remain slightly above 2 percent annually this year because consumers’ incomes have been rising faster than the production cost of things.
Quarterly labor productivity has been surging, despite poor first quarter results. Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023 I said last week, as output increased 3.5 percent and hours worked increased just 0.3 percent.
It’s not clear to economists if such a productivity surge has to do with happier workers receiving better salaries and benefits; or the increasing use of technologies such as AI because of worker shortages across many industries.
It’s probably a combination of the two. The contrast between Q1 and Q2 growth is going to be huge—Q1 will probably be upgraded in the 2nd and 3rd estimations with more information, as well.
That’s why markets should settle down, even with several wars and maybe protests continuing into the summer of a presidential election year.
Harlan Green © 2024
Harlan Green on Twitter: https://twitter.com/HarlanGreen
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