Evening Brief – 04.23.24
Overheating or Slowing Down?
The US economy appears to be on course for slower growth in the first quarter GDP data, which is due out on Thursday. As of last week, the Federal Reserve Bank of Atlanta’s GDPNow model predicted a growth rate of 2.9%. However, other economists expect growth to be closer to 2%, while the Federal Reserve Bank of Philadelphia’s survey of professional forecasters predicts an annual rate of 2.1%.
The economy grew 3.4% in the fourth quarter of 2023, down from the blistering pace of 4.9% in the previous quarter. While this represents a deceleration in economic activity, most forecasts for the first quarter suggest that the economy will continue to grow at a solid enough rate to mitigate the risk of a recession.
Some would suggest the economy is running too hot. “The strong recent performance of the U.S. reflects robust productivity and employment growth, but also strong demand in an economy that remains overheated,” said IMF chief economist Pierre-Olivier Gourinchas. “This calls for a cautious and gradual approach to (monetary) easing by the Federal Reserve.”
Conversely, other economists are concerned that the Federal Reserve’s delay in interest rate cuts boosts the possibility of problems later this year. The issue rests on the lag effects of rate hikes over the last two years, which some economists believe will extend the downturn into the second quarter and beyond.
A key aspect supporting the optimistic economic outlook is that consumer spending is strong on a real (inflation-adjusted) basis. “Real personal consumption growth has remained remarkably resilient in the face of the Fed’s monetary policy tightening campaign that began in March 2022,” wrote economists at Wells Fargo.
The bank’s prediction for spending in the first quarter is projected to fall somewhat compared with the previous quarter, but not significantly enough to raise concerns that consumer spending is slowing.
“Consumers once again seem to have been unfazed by elevated interest rates and inflation over the [first] quarter,” the analysts explained. “Hot retail sales spending in March and the largest jump in services spending in more than a year in February point to real personal consumption expenditures advancing at a 3% annualized pace during the quarter.”