Q1 GDP Better Than Estimate

 The Mortgage Corner

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.

BEA.gov

“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

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

Signs of Deflation Begin to Appear

The Mortgage Corner

Today’s Producer Price Index for Final Demand, a measure of the cost of wholesale prices, provides the first concrete evidence that we may be entering a period of deflation this New Year.

And, perhaps require the Fed to begin to lower interest rates as soon as in March. Though ongoing wars may cause future shortages but that isn’t happening at present.

Why? Raw material costs are declining into deflation territory, a sign of overproduction, which means prices that consumers must pay for the finished product or service will possibly decline into negative territory as well—when the excess profit margins of distributors and retail sellers that took advantage of the pandemic shortages also subsides.

Overproduction last happened in the 2007-09 Great Recession, as I’ve said, and began a period of Quantitative Easing requiring the Fed to buy massive amounts of securities to increase liquidity enough to boost the inflation rate back to the 2 percent range.

Wholesale prices this round first went into negative territory in July 2022 (-0.28%) per the FRED PPI graph, then fluctuated wildly for several months as supply chains recovered. But the PPI has been negative for the past 3 months, which is a sign that most supply chains have more than recovered.

FREDppi

The danger of overproduction has happened many times in the past and been a major cause of recessions. The Great Recession was caused by the overproduction of housing, for example; some one million excess units.

We saw signs of this in yesterday’s Consumer Price Index as well, when the so-called core index without food and energy prices declined to 3.9 percent for the first time since May 2021, mainly due to lower energy, healthcare, and used car prices.

Energy prices are declining because non-OPEC countries are now outproducing OPEC oil producing countries, for starters, and the food category was up just 2.7% year-over-year, with food away from home up 5.2% during the month and food at home up just 1.3%.

The FAO Food Price Index, which tracks monthly changes in the international prices of commonly traded food commodities, was 13.7% lower last year than the 2022 average, but measures of sugar and rice prices growing in that time.

The pace of inflation for food at home has now been below the Federal Reserve's overall target rate of 2% for three straight months, although the overall level of food prices is still elevated compared to two and three years ago.

Another reason for the deflation concern is consumers usually cut back their spending in the spring. The holiday spending spree is over, and tax season is approaching, which makes personal savings a priority.

In fact, we are already in the Fed’s 2 percent target range. The Personal Consumption Expenditure Price (PCE) Index is already at 1.9% and Core CPI Prices at 2.0% over the past 6 months.

What Fed officials seldom admit is the 2 percent inflation target isn’t a reliable target because there is no accurate measure of inflation as economists such as former Fed Chairman Ben Bernanke have admitted.

Overproduction can become a serious problem as it was during the Great Recession, but the possibility of supply disruptions because of the ongoing Ukraine and Middle East conflicts have made financial analysts leery of even mentioning the possibility of deflation.

The possibility of deflation scared the Fed enough under former Chairman Ben Bernanke to cut the Fed Funds rate to zero percent for a prolonged period—from December 2008 to February 2016.

Can that happen again if the Fed doesn’t begin to lower interest rates sooner?

Harlan Green © 2024

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