Lower And Higher
April 26, 2024 -- In a situation that's not exactly the best of both worlds, economic growth turned lower in the first quarter of 2024 while inflation turned higher. A period of soft growth would likely ultimately exert the kind of downward pressure on prices that the Fed is hoping to see, but only if it is also accompanied by the enough softening in the labor markets to ease wage pressures. Of course, none of this is in place at the moment and early readings on GDP growth are known to be revised, sometimes considerably.
In a precursor to the initial reading of first quarter GDP, the Federal Reserve Bank of Chicago's National Activity Index found that economic activity strengthened a bit in March, as their amalgam of 85 economic indicators moved up from 0.09 in February to 0.15 for the latest month. March's positive reading makes it two increases in a row, and suggests that economic growth was running a bit above the economy's "potential", or ability to grow without throwing off inflation pressure over the last couple of months. While somewhat of a moving target, "potential" is thought to be GDP growth somewhere between 1.9% and 2.4%, but regardless of the specific level, the index did point to above-par growth for two thirds of the first quarter and stronger activity to end it.
Forecasts for first quarter GDP centered around a 2.5% rate for the period, which would have been a deceleration from the final stanza of 2023 but still strong enough to be above potential. In its final estimate before the official advance estimate, the Federal Reserve Bank of Atlanta's GDPNow estimate also suggested that growth ran at a 2.9% clip for the period.
These forecasts and other estimates were caught a bit off guard when the advance estimate for GDP for the first quarter came in at a muted 1.59%, less than half the final fourth quarter rate of 3.4% growth. Consumer spending was lessened but still positive overall, as was investment, but there was considerable drag exerted from sluggish inventory growth and a decline in exports that helped create the muted headline figure.
Unfortunately, the GDP report also reinforced what was already suspected for the quarter in that inflation moved upward again. The Personal Consumption Expenditure (PCE) calculation in the GDP report pegged overall price increases at 3.4% for the first quarter, up from 1.8% to close 2023, and core PCE for the three months ended March pushed back up to 3.7% annual rate from a flat (and Fed preferred) 2% pace at the end of last year.
Lower growth and higher inflation isn't a great combination. One would tend to call for looser monetary policy; the other, tighter, or at least steady at a "restrictive" level for a longer period of time, much as we have in place now.
Investors had been waiting on the monthly PCE report this week, which came out on Friday. The goods news is that the report wasn't more bad news regarding inflation, but it also didn't provide any sense that price pressures will be quick to fade, either. Overall PCE came in for March at a 0.3% rate, the same as was seen in February, and the 0.3%, 0.3% and 0.4% monthly readings to start 2024 are in sharp contrast to the 0.0%, 0.0% and 0.1% seen in the fourth quarter of 2023. With the March update, overall PCE inflation ran at a 2.7% annual clip, up from February's 2.5% rate and the highest yearly level since November.
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Core PCE for March fared no better, sporting an identical 0.3% rise as the headline, and the cadence here of 0.3%, 0.3% and 0.5% to start 2024 isn't especially comforting for investors. However, with a number of soft readings from last year still in the calculation, the annual rate of core PCE inflation at least managed to stay at a 2.8% rate for a second consecutive month. Overall, the PCE report wasn't especially good, but at least wasn't worse than expected, and that was enough to help interest rates stop rising and even settle back a little on Friday.
Monthly PCE data comes out of the Personal Income and Spending report, and some of the details in the March version weren't especially inflation friendly. Overall, personal incomes rose by an as-expected 0.5%, up from a more modest 0.3% gain in February. The components of the total may raise an eyebrow or two at the Fed, since wage and worker compensation came in at a 0.7% increase for a second consecutive month, and wage growth is rising again after mellowing for much of the last year. The other item of special note is rental income, which posted a 1.6% increase for March after back-to-back 1.7% months to start the year. Shelter inflation has been a core drive of core CPI inflation for some time and persists despite expectations that it would be trending downward by now. Other components supporting the income gains included increases in proprietor's incomes, receipts on assets and direct government supports (aka "transfer payments").
Solid income gains were outstripped by spending. Personal outlays rose by 0.8% last month, and so eroded the national rate of savings, which dipped to 3.2% from 3.6% in February. With outgo exceeding income, the difference has to come from either savings or new borrowing, and it looks as though it was savings that took the hit in March.
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There's little chance that the housing market will be strong this spring, what with little to buy, high home prices and now five-month highs for mortgage rates. Still, that's not to say there will be no activity, and indications are that there was at least some to be seen in March. Sales of new homes last month came in at an annualized 693,000, up 8.8% from a February figure that was revised downward by 25,000 units (from an estimated 662,000 to 637,000). This change makes March's gain in sales somewhat less impressive and also opens the prospect that a chunk of March's reported sales may be revised away next month. Regardless, a increase is an increase, and it appears as though at least some potential home buyers are migrating over to the new construction markets to escape the frustrations of the existing home market. Even with March's faster pace for sales, there remain plenty of new homes available to buy, as the supply of new homes is still a fat 8.2 months available. As well, and even though the price of a new home sold in March was about $25,000 higher than in February, the $430,700 price tag was also still 1.8% below the same month a year ago, and so a relative bargain compared to the 4.8% increase for existing home prices over the same period.
In addition to an upturn in sales of new homes, the Pending Home Sales Index for March from the National Association of Realtors found a 3.4% increase in the number of purchase contracts signed in March. This gain lifted this indicator of future sales to just slightly above where it was last year during the same month. Should all these signed contracts make it to the closing table, they would help lift April and May sales somewhat, putting them back on par with where they were last spring, give or take a little. Of course, mortgage rates were also somewhat lower in March than in April (and likely for at least early May, too), so the chances of a strong follow-through in those months isn't all that likely to occur.
A couple of regional reviews of manufacturing activity didn't suggest that things have improved very much, as local factory-activity reports from the Federal Reserve Banks of Richmond and Kansas City both remained subdued. The Richmond Fed's manufacturing barometer posted a -7 value for April, an improvement of sorts over the -11 March mark; in the Fifth District, new orders were a better grade of poor with an eight-point increase to all of -9, while the employment measure stepped back to two points below par. The inflation-tracking "prices paid" index was essentially flat.
Out in the heartland, the Kansas City Fed's similar yardstick found similar results. The overall manufacturing index for the Tenth Federal Reserve District eased by a point, sliding to -8 for April. As was the case in Richmond, orders improved to a less negative stance, as the 11 point climb for this component still left it at -6 for the month. Employment backslid, however, falling eight points to -2 for April, and prices paid by manufacturing concerns in this area were also flat compared to March.
Orders for durable goods did kick 2.6% higher in March, so you would expect that at least some of them would have made to factories, but perhaps not especially those in the Fifth and Tenth districts. Still, this increase should help lift overall factory activity, as it was a second consecutive gain in orders. As well, there was even a 0.2% increase in so-called "core" durable goods orders, a proxy for business-related investment that excludes pricey aircraft and military-related items. March's gain was a second consecutive increase for this measure and the third in the last four months. We'll see what a broad review of manufacturing in April reveals when the next ISM report comes out next Wednesday.
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We'll also see what's happening with labor conditions next Friday, since the April employment report is due. At least based on initial claims for unemployment assistance, there's little reason to expect that labor conditions have deteriorated much if at all, although hiring may not continue to post the kinds of heady increases seen to start 2024. Initial claims for unemployment benefits totaled only 207,000 in the week ending April 20, down a little from the recent pattern but essentially holding very flat at a low level for months now. Businesses remain reluctant to let employees go, and those that do become separated from former positions appear to be finding new positions readily.
With mortgage rates higher over the last few weeks, it's unsurprising that requests for mortgage credit have retreated, even if the spring homebuying season is coming up to speed. In the week ending April 19, the Mortgage Bankers Association reported that applications for mortgages declined by 2.9%, pulled backward by a 1% decline in requests for funds to purchase homes, but also by a 5.6% slump in those to refinance existing home loans. With firmer rates in place this week, activity detailed in the next report will likely retreat somewhat more.
Consumer moods aren't especially dark at the moment, but they certainly haven't brightened much over the last while, either. The final April review of Consumer Sentiment from the University of Michigan saw a decline of 2.2 points compared to March, with the headline figure slipping to 77.2 for the month. Present conditions were assessed to be slightly less favorable, with a 3.5-point drop leaving this portion at 79.0 for the month, while expectations dimmed by just 1.4 points to 76.0 to close the month. Inflation expectations did turn higher, though, with the one-year outlook lifted back up to 3.2% (from 2.9%) and the five-year horizon back to 3% from 2.8% last month. These price expectations are in line with where they have been, but both the 1-year and 5-year outlooks have returned to levels last seen about six months ago.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Apr 19 | Mar 22 | Apr 21 | |
| 6-Mo. TCM | 5.39% | 5.37% | 5.08% |
| 1-Yr. TCM | 5.17% | 5.02% | 4.80% |
| 3-Yr. TCM | 4.80% | 4.44% | 3.91% |
| 10-Yr. TCM | 4.63% | 4.28% | 3.58% |
| Federal Cost of Funds |
3.893% | 3.889% | 3.239% |
| 30-day SOFR (daily value) | 5.33002% | 5.32039% | 4.73335% |
| Moving Treasury Average (MTA/12-MAT) |
5.114% | 5.088% | 3.744% |
| Freddie Mac 30-yr FRM |
7.10% | 6.79% | 6.43% |
| Historical ARM Index Data | |||
The Fed meets again next week to consider all these items plus plenty of other ones, with a two-day meeting concluding on Wednesday. No change to policy is expected. However, we'd be surprised if the language in the statement or in Chair Powell's prepared remarks for his press conference don't overtly imply that the Fed was hoping for better news on inflation, and that until it comes, the chances of rate cuts are closer to nil than not.
Aside from the Fed meeting, next week's economic calendar is packed with end-of-the and first-of-the-month data. The Employment Cost Index precedes the meeting, while the April employment report comes after, and worker productivity squeezes in between both of those. There are also both manufacturing and service-business ISM reports due and other items as well, so investors will be kept busy watching and interpreting the new signals.
As far as mortgage rates go, we keep hoping they'll go lower, but they have insisted on going higher lately. That said, the as-expected PCE report on Friday seems to have at least stopped the increase for now, so that's something, and leaves open the possibility that rates could plateau next week. Of course, what the data shows and what the Fed has to say will dictate whether that comes to pass, but as of now, we think that the average offered rate for a conforming 30-year fixed-rate mortgage may just manage to hold nearly steady when Freddie Mac's next update comes on Thursday.
Watch for our post-Fed meeting update on Wednesday afternoon, too.
What's the outlook for mortgage rates for much of the spring homebuying season? See what we think when you take look at our latest Two-Month Forecast for mortgage rates, covering April into early June.
To start each year, we release our Annual Mortgage and Housing Market Outlook. In it, we take a forward look at a range of topics, including mortgage rates, Fed policy, home sales, home prices and lots more; come July, we do an interim review of our expectations. Have a look and see if you think we're off or on point with our long-range forecast.
For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".
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