Economic Developments - May 2024 (2024)

Underlying Growth Remained Steady Through Q1 but Slowing Still Likely

First quarter 2024 GDP increased at a 1.6 percent annualized rate, below both consensus and our expectations. However, the headline miss was due almost entirely to the volatile net exports and business inventory investment categories; real consumption growth and private fixed investment were in line with our forecast. Real final sales to private domestic purchasers, the sum of personal consumption and gross private fixed investment, increased at a solid 3.1 percent annualized rate, nearly identical to each of the prior two quarters. While we see the underlying growth trend modestly decelerating, the weak Q1 topline figure likely overstates the pace of deceleration, and we expect a solid snap back in Q2, which we have upwardly revised in our outlook. However, on net, this quarterly change has no material impact on our full-year 2024 total growth forecast.

Putting aside near-term volatility, we do expect continued deceleration in growth as the year progresses. Strong consumer spending growth in February and March was not matched by income growth and, therefore, came at the expense of savings. We think growth in consumption is likely to slow, and the most recent pullback in core retail sales in April, which fell by 0.3 percent over the month, is supportive of this view. While revolving consumer credit balances remain normal relative to incomes, higher interest rates are likely putting some consumers under stress: Personal interest payments on all non-mortgage debt as a percentage of total personal outlays has been at its highest level since 2008 over the past three quarters, and recent data show an uptick in credit card and auto loan delinquencies. Additionally, we expect further softening in labor market conditions, which will likely limit consumption growth. The April employment report showed nonfarm payroll growth slowing to 175,000, a marked slowdown compared to the 269,000 average jobs added each month in the first quarter. While additional data will be necessary to definitively establish that the trend is slowing, a downshift in hiring would be consistent with other labor market indicators, such as the Job Openings and Labor Turnover Survey’s (JOLTS) job openings and quits rates, which have shown cooling labor market conditions for several months.

We believe the combination of softer labor market conditions and weaker consumption growth should flow through to lower inflation prints in the second half of the year. Further, we continue to expect measures of shelter inflation to weaken over time as measures of new tenant rents, including the Bureau of Labor Statistics’ (BLS) own series, show near-zero rent growth over the past two quarters. While these "fundamentals" point to decelerating inflation moving forward, releases to date have highlighted the risk that inflation pressures remain sticky. The Fed's preferred core Personal Consumption Expenditures (PCE) inflation averaged an annualized rate of 4.4 percent through the first three months of the year. While this strength can be explained away by idiosyncrasies in measuring items such as auto insurance and healthcare costs, alternative inflation measures, including the median Consumer Price Index (CPI), also point to some price stickiness that we believe will likely give the Fed and financial markets pause. Additionally, while most labor market indicators are pointing to softening, the Employment Cost Index (ECI) increased 1.2 percent in Q1, an acceleration of three-tenths compared to the prior quarter. As such, we still expect that the Fed will hold off on rate cuts until September and only cut twice this year. We view risks as weighted toward fewer than two cuts rather than three or more cuts. While the 10-year Treasury rate has pulled back after peaking around 4.7 percent at the end of April, the trend in 2024 has clearly been upward. Our May forecast shows a higher interest and mortgage rate path this year and next relative to our prior forecast.

One thing we, and the market, expect at the March Federal Open Market Committee (FOMC) meeting is some discussion of the policy regarding their balance sheet. The Chair noted at the last press conference that it would be a topic of discussion at the March meeting.

Home Sales Forecast Lower on Higher Mortgage Rates, but Recent Data Coming in as Expected

Existing home sales fell back 4.3 percent in March to an annualized pace of 4.19 million, in line with our expectations. While we expect home sales to remain sluggish going forward, the flow of new listings has remained steady in recent months despite generally rising mortgage rates, suggesting that additional sizeable sales declines are unlikely. We suspect that, for a myriad of reasons, enough would-be sellers are deciding they can no longer put off moving. In April, the supply of active listings, according to Realtor.com, was up 30.4 percent from a year prior. While the higher mortgage rate forecast this month translates into a modest downgrade to 2024 sales, we see the flow of for-sale listings in the near term as being relatively resilient to recent mortgage rate moves. We forecast a modest drift upward in existing home sales over our forecast horizon.

New home construction and sales look to be converging as expected. We had previously noted that the pace of starts has been elevated relative to the new home sales pace in recent months. Single-family starts fell in March by 8.7 percent, followed by a 0.4 percent decline in April, while new sales rose 8.8 percent in March. We expect this convergence to continue in the near term via a combination of homebuilders offering incentives to move existing inventories and a modest slowing in the pace of starts. While existing home sales listings are loosening somewhat, the housing market remains tight in most metros. As such, we continue to expect a solid pace of new home construction over the next two years as buyers look to new homes due to the limited existing home supply.