This Week's State Of The Economy - What Is Ahead? - 31 May 2024

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Jun 04, 2024

This Week's State Of The Economy - What Is Ahead? - 31 May 2024

Markets digested a light lineup of economic data on the holiday-shortened week. Our second look at first quarter GDP revealed an economy increasingly pressured by high interest rates as headline growth was revised down to 1.3% from 1.6% previously. Peeking under the hood, it was a further pullback in consumer goods spending that was ultimately responsible for the weaker showing. Durable goods spending contracted at a 4.1% annualized rate compared to 1.2% in the first estimate. The larger services spending category held firm, rising at a 3.9% annualized rate, indicating consumer spending is not in a complete retreat. Alongside the GDP revisions, corporate profit data showed profitability softened in Q1 but remains strong on-balance. The profit outturn was not entirely unexpected as comments accompanying Q1 earnings releases of Fortune 500 companies warned of consumer momentum abating.

To that end, the April Personal Income and Spending report suggested consumers may be taking their foot off the gas as they round into Q2. Headline income growth was relatively muted, rising 0.3% in April, and once adjusting for inflation, real disposable income dipped 0.1% over the month. Inflation-adjusted spending declined 0.1% over the month, led lower by declines in real goods spending. More specifically, spending on gasoline and recreational goods pulled back, hinting that consumers are spending less time traveling and going out. Services spending eked out a 0.1% gain, but this was owed to increases in non-discretionary spending categories such as housing and healthcare. Discretionary services spending moved lower as consumer spending habits seem to be turning more selective, sentiments that are echoed in the Fed’s recent Beige Book which we cover in Topic of the Week.

Markets got another read of inflation data as the both the year-over-year PCE and core PCE deflators were unchanged at 2.7% and 2.8%, respectively. At first take, the data do not show the “meaningful progress” on inflation the Fed is looking for, but it is at least consistent with cooling price growth, particularly for services. “Super-core” inflation, which strips out housing from core services, rose at a 3.6% three-month annualized rate, down from 5.4% in March. If sustained, the slowing in discretionary services spending should help rein in services inflation. Continued softening in price pressures leaves the door open for the Fed to cut rates later this year, but further progress is needed.

Last week’s existing and new home sales data underscored how deteriorating affordability conditions are suppressing demand in the housing sector. This week’s batch of housing market data served to reinforce this trend. Despite some increases in inventory heading into the spring selling season, home price growth has yet to cool. Nationally, home prices advanced 6.5% over the year in March per the latest data from S&P CoreLogic. Ongoing price appreciation has pushed home prices 2.7% above their previous June 2022 peak. What’s more, price appreciation seems to be accelerating even in the face of lagging sales and growing inventory. Seasonally adjusted home prices grew at a three-month annualized rate of 4.9% in March, up from a 3.5% run rate in January. Rising prices combined with mortgage rates averaging north of 7% for the past two months have resulted in a broad retreat in homebuying.

Leading indicators for the housing market signal that the route is likely just beginning. The NAR’s Pending Home Sales Index, which leads existing home sales by one to two months, slid 7.7% over the month, the largest decline in over three years. Furthermore, mortgage applications for purchase fell to a three-month low in May. Homes sales are still running above recent lows, but until affordability conditions improve—whether through increasing inventory and/or accommodative monetary policy—the housing market will likely remain in stall speed.

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