• Despite developing concerns that slowing economic growth and still-sticky inflation may be pushing the U.S. economy into “stagflation,” equity markets looked past some of the disappointing data and toward a consumer-driven economy where incomes and spending remain strong.

GDP Growth Estimate Surprises Markets

  • The advanced estimate of first quarter (1Q) gross domestic product (GDP) surprised markets, as the economy grew at only a 1.6% annualized rate compared to the consensus estimate of 2.2% and the Atlanta Federal Reserve’s (Fed’s) GDPNow estimate, which hit +2.7% right before the GDP report. This slower-than-expected growth accompanied a higher-than-expected increase in the chain-weighted Consumer Price Index (CPI) measure, which showed 3.1% inflation for the quarter. This measure came in higher than the +2.7% estimate and the +1.7% reading from the fourth quarter of last year. This indicator of continued stubborn inflation reduced the probability of 2024 federal funds rate cuts to just one.
  • While economists and market participants were concerned by disappointing 1Q growth, the underlying components of 1Q growth provided some comfort as trade and inventories were the primary factors in the shortfall. The stronger U.S. economy led to a higher trade deficit. Demand for imported goods increased domestically as relative global weakness muted the demand for American exports.

Growing Incomes Keep Consumers Spending

  • Consumer spending grew at a rate of 2.5% in the first quarter, and although this was less than the +3.0% estimate, it is still rather strong growth that defies any interpretation of economic stagnation. Consumers notably skewed their spending toward services, which grew 4.0%. Goods consumption declined 0.4%, which better explains the decline in inventory investment as businesses remain disciplined in managing inventories.
  • Capital spending grew at a 2.9% rate during the quarter, with spending on intellectual property increasing 5.4%, indicating continued business investment in productivity-enhancing technology. Both housing and government spending contributed to growth during the quarter.
  • Looking at the higher frequency weekly and monthly data, the continued strong labor market kept incomes growing. March personal income rose 0.5%, in line with estimates and better than the +0.3% reading from February. With weekly jobless claims remaining at historically low levels (barely over 200,000), consumers increased their spending at a 0.8% rate month over month. Factoring in March inflation, real spending was up roughly 0.5% for the month, with no evidence of stagnation within the important consumer sector.

Inflation Not Likely to Reaccelerate

  • With the price data in the GDP report adding to concern raised by the prior week’s hot March CPI report, markets anxiously anticipated the core Personal Consumption Expenditures (PCE) price index inflation data that accompanies the personal income and spending report. Market participants took some comfort in core PCE that were in line with expectations at +0.3% for the month and the year-over-year measure, which remained at 2.8%. The stalled progress toward the Fed’s 2% target may be frustrating, but there is little indication that inflation will soon reaccelerate. Markets will look to this week’s April nonfarm payrolls report to determine if progress has continued on reducing wage inflation.

Home Sales Rise Despite Higher Mortgage Rates

  • Two more encouraging data points confirmed a turn in the housing sector, as March new home sales rose 8.8% and pending home sales were up 3.4%. Both reports easily exceeded estimates, c that buyers are responding to the increased supply of new and existing homes despite higher mortgage rates.

Businesses Remain Cautious but Continue to Spend

  • 1Q GDP data reflected some caution around business spending but no apparent signs of notable pullback. March orders for durable goods confirmed that businesses are still spending to meet consumer demand. Orders grew 2.6%, surpassing the 2.0% estimate and the +0.7% reading from February. As transportation orders were up 7.7% month over month, core orders (nondefense, excluding aircraft) might be more reliable indicators. These grew at a much more modest 0.2%, with February revised down to +0.4% from the originally reported +0.7%.
  • In another indication that businesses remain cautious but not overly frightened of a recession, the April S&P Global mid-month flash manufacturing Purchasing Managers’ Index (PMI) came in at 49.9, below both the 52.0 estimate and the 51.9 registered in March. New orders declined below 50 for the first time in six months. In keeping with the U.S. economy’s overall theme for over a year, the services PMI remains in expansion at 50.9, although that was lower than the 52.0 estimate and the 51.7 reading from March. A developing trend of rising input prices is somewhat concerning and bears watching.

 Large-Cap Tech Companies Increase Guidance

  • Earnings season has been a little up-and-down so far, but last week’s results from large-cap technology companies mostly comforted the markets. The capital spending plans of Meta, Alphabet, and Microsoft were particularly notable. Their increased guidance helped semiconductor stocks rebound, particularly AI-affiliated companies like Nvidia. Halfway through the 1Q earnings season, estimates for the quarter are about 1% below their startpoint. While that result may disappoint some investors, it is in keeping with trends through recent earnings seasons. A little less than half of the reports have come in so far. Some 174 of S&P 500 Index constituents will report this week, including very important reports from Amazon and Apple. 

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