Poor Economic Growth Ahead?

Popular Economics Weekly

First-Quarter GDP Growth Estimate Decreased “On April 7, the GDPNow model estimate for real GDP growth in the first quarter of 2026 is 1.3 percent, down from 1.6 percent on April 2.”

AtlantaFed

More warnings of slowing economic growth are appearing. And now we have a Gulf War that makes predictions more unpredictable. Who knows what’s to come?

The Atlanta Federal Reserve’s GDPNow estimate of first quarter (Q1) 2026 economic growth that is widely followed by economists has plunged from its high of 3 percent, where it had been sitting since January 2026, to 1.3 percent in the latest revision.

Why the surprise drop, since fourth quarter 2025 GDP growth had already plunged from 1.4 percent to 0.7 percent in its latest revision?

Much higher GDP growth in Q2 and Q3 last year showed that financial markets were buying the Trump message that American taxpayers and businesses would start spending more from the Big Beautiful Tax Bill write-offs this spring.

The latest retail sales and a good March unemployment report (+178,000 jobs) had kept up optimism for a better year. There were also hopes that increased business investments—another component of GDP—would create more jobs.

But in fact the opposite is happening. Most business investment is being spent on AI energy centers, which is causing more joblessness, with wholesale job layoffs being announced as a consequence—at the likes of Amazon, which has announced a total of 30,000 job cuts to date.

And we are seeing imports continuing to flood in, far out distancing exports, which increases the trade deficit and brings down our Gross Domestic Product growth, since GDP measures only what is produced or sold in the U.S.

The Wall Street Journal survey says that on average, economists forecast gross domestic product adjusted for inflation to grow 2.1% in the fourth quarter this year from a year earlier. That was down incrementally from 2.2% in January. They expect the unemployment rate will be 4.5% in December, matching their forecast in January, before the war. Last month the unemployment rate was 4.4%.

Economic Growth is difficult to forecast; economists will tell you. And the Atlanta Federal Reserve is one of the few that dare to do it. We don’t even have the final fourth Quarter 2025 revision yet, which has shrunk steadily as I said after a much better looking Q3 of +4.4 percent GDP growth.

Besides job, trade deficit, and business investment data, the GDP includes consumer spending. That number hasn’t faltered as badly. So we should be looking at consumer behavior if we want to know what happens next.

I said last week that retail sales picked up in March, so consumers are shopping again and consumer confidence edged up as well.

There is something else that could improve consumers’ attitudes and hence GDP. Lower inflation would increase the demand for goods and services—but how to achieve it with $4 per gallon gas prices for who knows how long? Lower inflation is possible with AI efficiencies increasing labor productivity and lowering product costs. But it takes time, years, as with past technological innovations.

The just-announced two-week ceasefire could certainly bring down oil and gas prices, if it holds, and Trump will want it to hold given its unpopularity.

The Federal Reserve is hinting it could go up or down on their interest rate decisions this year. But if the labor market continues to shrink the Fed will also want lower interest rates ahead. And any easing of credit conditions (lower cost of borrowing) would be good news for economic growth this year.

Harlan Green © 2026

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why a Recession Now?

 Financial FAQs

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -2.4 percent on April 9, up from -2.8 percent on April 3.

AtlantaFed

The Atlanta Federal Reserve’s GDPNow graph of estimated first quarter economic growth is still the best representation of where US economic growth is headed, I said last week. It has plunged from +3 percent where it was during the Biden administration, to a range from -2 to -3 percent of GDP contraction since March 4, 2025.

Why? Trump’s tariff wars. Here’s the latest headline from MarketWatch on the automobile tariffs, for instance. GM, Ford and Stellantis face extra $5,000 cost for each car made in America, thanks to Trump’s tariff on parts

The Big Three automakers also are dealing with an average tariff cost of nearly $9,000 for each finished vehicle that’s imported, according to a new study by the Center for Automotive Research.

Its key findings were:

• · Increased cost of $107.7 billion to all U.S. Automakers.
• · Increased cost of $41.9 billion to the D3 Automakers.
• · Impact to D3 production volume of 6.8 million vehicles.

Trump has delegated himself emergency powers that really belong to congress to enact his tariffs, when there is no emergency. President Biden’s tariffs were already doing the job of protecting American workers and industries. The manufacturing sector had added 700,000 jobs and were building new factories because of the CHIPs, Infrastructure, and Inflation Reduction Acts during Biden’s administration.

This President is really driving economic growth off a cliff not because of a huge persecution complex (it’s an act), but to enrich himself and his Oligarchs. He maintains the taxes collected from the tariffs will offset more tax cuts, when he has done no research (or chosen to ignore what is available) on the effects of a worldwide tariff war.

Trump’s wrecking ball mentality is even alarming the Oligarchs. Ray Dalio, Founder and Chief Investment Officer of Bridgewater Associates, the world’s largest hedge fund, said recently on CNBC, “We have a breakdown of the monetary order. Such times are very much like the 1930s…I’ve studied history, and this repeats over and over again.”

What did he mean? The US bond and currency markets were collapsing. US Treasury Bond yields soared 0.5 percent in a week, and the US Dollar’s value in relation to other currencies plunged. Foreign investors were losing faith in our economy at a time when Republicans want to add approximately $5.8 trillion to our national debt with their tax cuts, and record debt holdings by foreign investors.

Those foreign investors determine how much that additional debt will cost, or they may not want to buy some of that debt in the form of more US Treasury bonds or Mortgage-backed securities. Former Treasury Secretary Lawrence Summers has said it’s making US look like a third world country.

That’s enough bad news to scare anybody, as even small businesses are now worried. “The implementation of new policy priorities has heightened the level of uncertainty among small business owners over the past few months.” said NFIB Chief Economist Bill Dunkelberg.  “Small business owners have scaled back expectations on sales growth as they better understand how these rearrangements might impact them.”

Surveys show consumers are now beginning to save rather than spend, also a sign of a possible recession. Their spending behavior has reversed from the past four years under President Biden when we were the world’s fastest growing economy.

MarketWatch cites Primerica, for instance, a firm specializing in life insurance and securities, who conducted a survey in late December of people with household incomes ranging from $30,000 to $130,000, or roughly the middle 60% of Americans.

“Despite increases in income, about 73% of middle-income Americans said they are cutting back on nonessential purchases due to the high cost of living, and 84% are eating at home more frequently.”

That is why Republicans and DOGE are on such a cost-cutting spree. But Elon Musk appeared to dramatically lower DOGE’s savings goal, projecting $150 billion for the year—far short of his earlier trillion-dollar figure at a recent cabinet meeting, said Fortune Magazine. However, questions remain about the savings claimed by the team, with critics pointing to inflated numbers, retracted claims, and a growing list of controversial cuts.

This is why we are hearing horror stories about the cutbacks coming from social security and Medicaid services, with maybe more to come. We are no longer the economy to be envied, if Republicans in their greed destroy the faith and credit of the U.S. government.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

"Liberation Day" Has Come!

 Financial FAQs

Dow opens 1,200 points lower, S&P 500 and Nasdaq plunge as Trump tariffs roil markets; Apple, Nvidia and Nike slump; dollar and gold dive. U.S. stocks are plunging a day after U.S. President Trump outlined new tariffs aimed at reordering global trade. MarketWatch

AtlantaFedGDPNow

This above graph best portrays what is both sad and terrifying about the result of President Trump’s “liberation day” tariff announcements. The Atlanta Federal Reserve’s GDPNow estimate of first quarter economic growth shows an economy being driven over a cliff.

The MarketWatch headline of the DOW’s 1200 point drop announcing the reaction of US financial markets the next day was just as terrifying.

Trump is so steeped in his delusions of grandeur that he believes bringing back President William McKinley’s tariff policies that were instituted just before the turn of the last century (1890) will make America great again.

But in fact, McKinley’s policies created the Robber Barons and monopolies that led to so much corruption and concentration of power that it ultimately caused the Great Depression and ultimately World War II.

It is a sad time because it confirms one political party is ignorant of not just economic facts but is willfully ignorant of the damage higher tariffs will do to other economies, not just ours.

The US economy was the “envy of the world”, said The Economist when President Biden handed off of the fastest growing economy in the developed world to the Trump administration that had brought the US out of the COVID-19 pandemic.

McKinley era economists were largely ignorant of the economic knowledge learned since then. But Trump and his Republicans’ ignorance of basic economic facts today isn’t excusable. Tariffs are a tax levied on imports, which raises the price of those imports.

There is another effect of increased tariffs that will add to the pain. The trade barriers it sets up will reduce the flow of foreign trade that will create supply shortages as happened during the COVID-19 pandemic. This was the root cause of the inflation surge in 2021 that induced the Federal Reserve to raise interest rates and borrowing costs for consumers, hurting lower-income folks the most.

Last Wednesday President Trump had already announced 10% universal tariffs on all imports to the U.S., which totaled more than $4 trillion last year, according to the Bureau of Economic Analysis, or almost 14% of total economic output.

“He announced more on Chinese goods, adding to the double-digit levies already in affect, plus additional ones for countries that he deems to have excessive barriers to imports from the U.S.,” said MarketWatch.

We will soon have concrete evidence of the inevitable result—actual stagflation. It will firstly appear in higher prices, the (-flation) result that will cause consumers to buy less. This in turn will begin to slow economic growth, the (stag-) component of stagflation.

We shouldn’t forget what happened during William McKinley’s era. It was the first Gilded Age that created the Robber Barons of that day, just as the Oligarchs seated in rows behind Trump during his inauguration, will benefit the most from Trump’s ‘liberation day”.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Economic Growth Slowing...Because?

 Popular Economics Weekly

“The U.S. government is currently under the control of a deeply ignorant, vengeful megalomaniac with zero impulse control. And it’s not just Elon Musk: Trump shares the same characteristics.” Nobel Laureate Paul Krugman

AtlantaFed

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -1.5 percent on February 28, down from +2.3 percent on February 19.” Atlanta Federal Reserve

Watch out below, as economic growth looks to contract (-1.5 percent) in the first quarter of 2025! Trump’s abrupt announcement of tariffs on Mexico, Canada, and China, as well as Elon Musk’s indiscriminate slashing of payrolls and elimination of whole government agencies created a shock to economic growth that we have not seen in a long time.

How do we know? For starters, Trump’s tariff announcement caused a sudden plunge in predictions by Fed officials and economists of first quarter 2025 economic growth. The Atlanta Fed’s GDPNow estimate (graph above) dropped almost 4 percentage points from earlier predictions in part because of Trump’s just announced tariffs; that is a record plunge, I might add. They will be levied on Mexico, Canada, and China, which will mean higher import prices ahead for consumers when Trump had promised to lower inflation from ‘Day 1’.

And the just released U.S. Personal Consumption Expenditure (PCE) read on inflation for January (see below graph) is another reason first quarter economic growth is worsening. Consumer spending declined for the first time in two years, and consumer expenditures make up the largest component of Gross Domestic Product growth.

BEA.gov

I said consumer spending should weaken after the holiday shopping splurge in an earlier report, Are Consumers In Danger?, and it’s happened. U.S. first-quarter consumer spending growth was just 1.6% annualized—the weakest since the second quarter of 2023. Much of the spending slowdown was due to the horrendous Los Angeles wildfires, unseasonably cold winter temperatures, and consumers replenishing their depleted savings. The personal savings rate jumped from 3.8 percent to 4.6 percent (black line in above graph).

Some good may come out of the PCE report because its inflation index declined from 2.6 to 2.5 percent, which increases the likelihood that the Fed may cut interest rates further, especially if the labor market continues to soften.

Elon Musk’s mass layoffs and complete elimination of whole federal agencies without plan or regard for the consequences will have a disastrous effect on the job market as well.

Well-regarded Chief Economist Torsten Slok of Apollo Global Management estimates there could be 300,000 federal job cuts, but when private-sector contractors that work for them are included, a total of one million jobs could be at risk, in a Barron’s article by Randall Forsythe.

And this is just the beginning. The uncertainty and craziness of Trump and Musk’s actions are already showing up in the alarming drop in consumer confidence surveys as well.

There is a better way to trim government excesses. Even Musk has acknowledged that “What @DOGE is doing is similar to Clinton/Gore Dem policies of the 1990s.”

Not really. President Clinton’s “Reinventing Government” initiative headed by VP Gore was only initiated after an initial year of planning and cooperation with congress that resulted in four years of budget surpluses.

This is a far different approach than Trump/Musk’s  blatantly illegal attempts to usurp the power of congress and the constitution, which can only lead to more court fights and budget deficits.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Q2 Economic Growth Is...?

 Financial FAQs

Estimates of 2024 second quarter economic growth have been all over the map, but I will attempt to separate the wheat from the chaff, so to speak.

Firstly, GDP growth is mostly dependent on consumer spending, which makes up some two-thirds of it. And right now, consumers continue to spend after hesitating in Q1 led to just 1.4 percent Q1 GDP growth. But I believe Q2 will be better, which will keep the budget deficit within an acceptable range. More on that later.

The Federal Reserve’s consumer credit measure for May—the 2nd month of the second quarter—just showed a big jump in consumer spending. Total consumer credit rose $11.3 billion in May, up from a $6.5 billion gain in the prior month, the Federal Reserve said Monday.

The rise in May translates into a 2.7% annual rate says MarketWatch’s Jeffry Bartash, stronger than the 1.5% rise in the prior month. Revolving credit, like credit cards, jumped by a 6.3% annual rate in May after a rare 0.8 % fall in the prior month. Nonrevolving credit, typically auto and student loans, rose by a 1.4% rate after a 2.4% rise in the prior month.

Why is this important? Revolving credit (i.e., cards) is spent on everyday items as well as travel and leisure, and we are in the summer season of most travel. This jump is spending should mean a boost in consumer confidence going into the fall.

The Atlanta Fed GDPNow estimate of Q2 growth jumped today, which I believe is the best indicator of what the BEA’s Q2 initial estimate of growth might look like that will be out in two weeks.

AtlfedGDPNow

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 2.0 percent on July 10, up from 1.5 percent on July 3…after last Friday’s employment report from the Bureau of Labor Statistics and this morning’s wholesale trade report from the US Census Bureau…”

Real Domestic Private Investment, a major component of GDP growth, has also been surging. It is now growing at 5 percent in Q1 and is up a total 11 percent from Q1 2023 when it was shrinking. This is huge, because, remember I mentioned in a recent blog that more private investment in infrastructure as well as CHIPS and other manufacturing incentives built into Bidenomics lessens the need for taxpayer funding and hence lowers the budget deficit.

And in more good news, Fed Chair Powell remarked at today’s house congressional hearing that the Fed will not wait to reach its 2 percent target rate before beginning to cut rates.

This is the best of news, though it will now have investors worrying about some unseen dangers that may lie ahead that the Fed may be worrying about. What are they? Watch the news!

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

U.S. Economy Still To Hot?

 Financial FAQs

The battle is intensifying between the Fed Governors’ inflation doves and hawks as we approach November. Chairman Powell says inflation is getting closer to the Fed’s 2 percent target when we enter the 3^rd quarter 2024, but he’s still not confident enough to advocate cutting interest rates.

This is while the Labor Department’s JOLTS report showed the number of job openings in the U.S. rebounded in May after falling to a more than three-year low, showing the demand for labor is still high.

It will only make the Fed’s decisions more difficult, since there is a lot of disagreement over how much the US economy will continue to grow (which the Fed worries might keep the inflation numbers too high).

Job postings rose to 8.1 million in May from 7.9 million in April, the Labor Department said Tuesday in its Job Opening and Labor Turnover Survey (JOLTS). Most of the increased hiring was in government. New openings have fallen from a record 12 million in 2022, but they are still higher than they were before the pandemic.

FREDjobopenings

An economic conference in Sintra, Portugal highlighted both sides of the inflation argument, with Chicago Fed President Goolsby saying Fed policy is now becoming too restrictive as the economy slows. It’s therefore time to consider cutting interest rates, though he didn’t want to “tie the Fed’s hand” by predicting when.

The best news was last week’s very weak Personal Consumption Expenditure (PCE) inflation index, which was flat. The Fed’s preferred inflation measure didn’t increase at all in June and annual inflation is now down to 2.6 percent.

And NYTimes Paul Krugman remarked in his latest Op-ed, “there’s a good case for arguing that inflation has been defeated, and that the Fed should start cutting interest rates.”

Friday will tell us another statistic the Fed looks at, the ‘official” US unemployment report, which will show how accurate are the job numbers.

Total nonfarm payroll employment increased by 272,000 in May, I wrote last month,, higher than the average monthly gain of 232,000 over the prior 12 months. The unemployment rate rose to 4.0 percent from 3.9 percent, slightly higher than the pre-pandemic levels of 3.5 percent when the average inflation rate was under 2 percent, as portrayed in the truncated FRED graph (gray line is 2020 pandemic recession), that many seem to remember so fondly.

The real argument is over who benefits from lower interest rates. Lower borrowing costs obviously benefit consumers in general; most in the middle and lower income brackets. But the Fed’s fear is that consumers will then spend more and thus drive up prices again, hence their hesitation in cutting interest rates just yet.

That in turn affects economic growth, which everyone wants, but not too much, if you can believe that. It stimulates more hires, which boosts wages, which the Fed believes is now the main inflation culprit.

The best predictor of economic growth has been the Atlanta Fed’s GDPNow estimate that gets revised at least twice a month. It has just been adjusted downward again in July1 to 1.7 percent, from as high in 3 percent one month ago.

AtlantaFed

It is now in line with the Blue Chip economists’ consensus of 2^nd quarter growth, which should begin to worry Powell’s Federal Reserve. Real personal consumption and domestic investment have been falling, in line with last week’s PCE report I mentioned above.

Retail sales last month were also flat, another concern as consumers look for more bargains and retailers such as Target and Walmart announce ever more discounts. The slowdown is now becoming a definite trend and better the Fed becomes proactive by nipping any downturn in the bud before the November election.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Falter--What Can Follow?

 Financial FAQs

American consumers are tiring after two years of no relief from higher prices and interest rates. They are now looking for bargains everywhere in the latest retail sales report from the Census Bureau.

It’s the second month of the second quarter that sales have disappointed, and consumer spending is a large part of Q2 growth.

FREDretailsales

“Advance estimates of U.S. retail and food services sales for May 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $703.1 billion, up 0.1 percent (±0.4 percent) * from the previous month, and up 2.3 percent (±0.5 percent) above May 2023,” said the U.S. Census Bureau.

This was in part because gas prices had declined -2.2 percent. Revised April retail sales had declined -0.2 percent. The retail report is going to boost both stock and bond prices, which means interest rates should continue to decline. It also means consumers are spending less on travel and entertainment, parts of the service sector that have been powering most of the economic growth to date.

The biggest negative in the May retail report was a 0.4% decline in spending at restaurants. Restaurant spending has fallen in four of the past six months for the first time since the pandemic. Sales also fell at home centers, grocery stores and stores that sell furniture — a residue of rising housing prices and high mortgage rates.

Yet sales rose at internet retailers, clothing outlets and big-box electronics stores, suggesting Americans still have some money left over to pay for so-called discretionary goods, or things people want, rather than need, to buy.

But manufacturing is taking up some of the slack as overall industrial production rose 0.9% in May, the Federal Reserve also reported on Tuesday. That is the biggest gain since last July. The manufacturing component rose 0.9% in May after a 0.4% fall in the prior month.

Part of the boost was from motor vehicles and parts output that jumped 0.6% after a 1.9% drop in the prior month. Excluding cars, total industrial output increased 0.7%, so auto sales are helping to boost growth.

What does it mean for Q2 economic growth? Estimates are still all over the map. The latest data was good enough to keep the Atlanta Fed’s GDPNow estimate of Q2 growth at 3.1 percent, up from 2.6 percent on June 6. It remained above 3 percent because a drop in PCE (consumer spending) was outweighed by a rise in second-quarter real gross private domestic investment growth (i.e., replacing inventory and buying new equipment) and second-quarter real government spending growth (on such as combatting climate change and modernizing the American economy).

Fed officials now must decide if they want to slow economic growth even more, and maybe risk a downturn come the fall. Do they want to spoil the holidays for shoppers by not cutting interest rates? I wonder if they will dare in this election year.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Q2 Economic Growth Any Better?

 The Mortgage Corner

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.”

ConferenceBoard

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.

AtlantaFed

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

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Boost Q1 Growth

 Financial FAQs

Consumers haven’t slowed shopping, even during tax season. They keep boosting economic growth which is edging above 2 percent annualized predictions again.

FREDretailsales

Retail trade sales were up 0.8 percent (±0.5 percent) from February 2024, and up 3.6 percent (±0.5 percent) above last year, said the US Census Bureau. Nonstore retailers were up 11.3 percent (±1.6 percent) from last year, while food services and drinking places were up 6.5 percent (±2.1 percent) from March 2023.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 rose 2.8 percent on April 15, up from 2.4 percent on April 10, “…after increases in nowcasts of first-quarter real personal consumption expenditures growth and first-quarter real gross private domestic investment growth.”

This is at the high end of Blue-Chip economists’ estimates; no wonder with such robust consumer spending, but this confuses the inflation picture.

It is an economic fact that indicates the US economy is doing very well, and that Main Streeters should believe it, contrary to the polls, I said last week. But will economic facts win out over the irrational pessimism showing up in consumer polls? The facts win out in retail sales.

The problem with the irrational pessimism measured by polls is that it seems to be largely based on the inflation picture. The fluctuating inflation indexes are higher at the moment because of housing rents that are adjusted once per year.

FREDHICP

But another inflation index, core CPI inflation without food, energy, tobacco or alcohol, the Harmonized Index of Consumer Prices (HICP) used by Europeans as a more accurate indicator of longer term inflation, indicates the inflation rate has been at or below 2 percent since June 2023, like the Producer Price Index.

Then why does the Fed keep saying they are unsure inflation has been tamed when rents are outside of their control? Because of “unknown knowns,” to paraphrase former Bush Defense Secretary Donald Rumsfeld when he was attempting to justify the invasion of Iraq?

He said in attempting to justify the unknown fact that Saddam Hussein had weapons of mass destruction that: “There are known knowns, things we know that we know; and there are known unknowns, things that we know we don't know. But there are also unknown unknowns, things we do not know we don't know.”

How is that a justification for anything? The same uncertainty can be said of unknown future economic events, so keeping interest rates at their maximum 5.25 percent and the Wall Street Prime Rate at 8.5 percent to suppress consumer borrowing when not knowing what are the future shocks that could again disrupt supply change, like the Covid pandemic and Ukraine war, are “things we do not know we don’t know.”

But with fixed 30-year mortgage rates again above 7 percent, we know it is hurting the housing market at a time when more housing is desperately needed.

Atlanta Fed President Rafael Bostick has been sounding the alarm on the housing shortage yet has been one of the Fed Governors reluctant to support lowering the Fed’s interest rates.

Bostic said in a recent conference, “Nationally, a household that earns the median income—roughly $75,000 a year—must spend 41 percent of that just to own the median-priced home, which would cost about $359,000. That percentage far exceeds the standard threshold for affordability, which is 30 percent.”

This is not an ‘unknown known’, since we know that lower interest rates would boost housing construction and hence supply, thereby bringing down rents and housing prices. Privately‐owned housing starts in March were14.7 percent below the revised February estimate . Single‐family housing starts in March were 12.4 percent below the revised February estimate.

Can we blame consumers for doubting the sincerity of the Fed Governors about inflation when they contradict themselves?

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Higher Growth Ahead?

Financial FAQs

The US economy hasn’t slowed down. Fourth quarter Gross Domestic Product (GDP) growth was revised slightly from 3.3 percent to 3.2 percent in the second estimate, but predictions for first quarter 2024 growth have increased.

BEAgdp

“The increase in real GDP (in Q4) reflected increases in consumer spending, exports, state and local government spending, nonresidential fixed investment, federal government spending, and residential fixed investment that were partly offset by a decrease in private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased,” said the BEA.

Consumer spending is the main reason growth was so strong. It was revised upward from 2.8 percent to 3 percent annually.

Inflation has been tamed as well. The personal consumption expenditures (PCE) price index increased just 1.8 percent, an upward revision of 0.1 percentage point. Excluding food and energy prices, the PCE price index increased 2.1 percent, an upward revision of 0.1 percentage point.

The PCE price index is the best measure of inflation, since the GDP covers total domestic economic output.

AtlantaFed

And the Atlanta Federal Reserve’s GDPNow estimate of first quarter 2024 growth was just raised. This has proven to be one of the most accurate future growth predictors, as I’ve been saying.

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 is 3.2 percent on February 27, up from 2.9 percent on February 16,” said the Atlanta Fed. “After recent releases from the US Census Bureau and the National Association of Realtors, the nowcast of first-quarter real gross private domestic investment growth increased from 2.5 percent to 4.6 percent.”

Gross domestic private investment is the other driver of growth, as the Inflation Reduction and Infrastructure Act $billions in government spending have seeded the increase in private investments.

And the US economy has been fully employed for more than two years, so there’s a scarcity of workers. Employers have needed to invest more in capital expenditures—whether its AI or more efficient factories—to meet the demand for their products.

This translates to workers being more productive, as I said recently.

Average employee salaries are also higher, and are now rising faster than inflation—as much as 2 percent above inflation in some sectors—which means even more demand for products, thus creating a positive loop. Higher salaried employees spend more, so companies will produce more.

That is why the cost of money has to come down, so companies can finance their projects. I said last week that James Bullard, former St. Louis Fed President, believes Powell’s Fed Governors need to begin to shrink interest rates sooner rather than later.

Bullard, in an interview with MarketWatch’s Greg Robb, said Powell doesn’t want to wait until inflation is actually at the 2% rate. “That would be the ‘Honey I forgot to shrink the policy rate’.” It is a phrase credited to Chairman Powell, who feared that the Fed would react too slowly to the rapidly plunging inflation rate, causing perhaps a recession.

The Fed’s benchmark rate is now in the range of 5.25%-5.5%. The neutral rate is below 4%. There are only three Fed policy meetings before the third quarter of the year. “The math is not adding up that the [interest rate] is going to be at the right level,” said Bullard.

And we have an upcoming budget crunch and possible government shutdown if our political parties can’t agree on next year’s budget in the next couple of weeks! That is the major uncertainty that could inhibit growth this year.

Harlan Green © 2024

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