The initial estimate of first quarter 2024 Gross Domestic Product (GDP) growth was less than expected (1.6%), causing financial markets to panic, even though economic growth is better than the initial estimate is reporting, I said last week.
What did Wall Street expect with the current domestic unrest and geopolitical uncertainty? Consumers are shopping less, and as conflicted as economic forecasters in predicting what will happen next.
The Conference Board’s just released Index of Leading Indicators (LEI) for April that attempts to predict future growth, was also conflicted.
“Another decline in the U.S. LEI confirms that softer economic conditions lay ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Deterioration in consumers’ outlook on business conditions, weaker new orders, a negative yield spread, and a drop in new building permits fueled April’s decline.”
Key figures are the interest rate spread and decline in building permits for private housing, because short-term interest rates are still too high in relation to longer-term rates. The Fed isn’t cutting their Fed Funds overnight rate yet, which has in turn has boosted the Prime Rate charged by most lenders to 8.5 percent and 30-year fixed mortgage rate above 7%.
But at the same time the LEI said in the six-month period between October 2023 and April 2024, the LEI contracted by -1.9 percent—a smaller decrease than its -3.5 percent decline over the previous six months, hence the blue line in its graph showed improvement while GDP black line in graph declined slightly from last year’s +3 percent growth rate.
Even consumers are becoming discouraged in the latest consumer surveys and have curbed their spending ways with retail sales unchanged last month. Sales are not adjusted for inflation, so sales couldn’t keep up with inflation.
Whereas, Q2 GDP growth estimates have been as high as 4 percent.
The Atlanta Federal Reserve’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 was reduced to 3.6 percent on May 16, down from 3.8 percent on May 15. It was briefly above 4 percent.
That is still above Blue-Chip economists’ estimates that have hovered between 1 to 3 percent.
Why does it make a difference? Higher growth is needed because the US and most of the EU countries are now gearing up for war as well as peace. NATO is getting involved by announcing they might send their soldiers to train Ukrainians on the front lines to stem the Russian advance, while China is allying more closely with Russia.
Housing is predicted to make a comeback despite high building costs and mortgage rates, per NAR Chief Economist Lawrence Yun in his latest update. He forecasts that interest rates will fall in the long term, 2024 existing-home sales will rise to 4.46 million (up 9% from 4.09 million in 2023) and 2025 existing-home sales will increase to 5.05 million (up 13.2% from 2024)
Yun also said that rents will calm down further, which will hold down the consumer price index (CPI) and encourage the Federal Reserve cut interest rates. He said that based on April's employment data, there are six million more jobs compared to the pre-Covid highs, and jobs are boosting home prices.
"More jobs mean more home sales and higher housing demand," said Yun. "You need a strong local economy for a strong housing market."
So Realtors are also seeing an upsurge in activity that should boost economic growth in 2024.
Harlan Green © 2024
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