Economics Weekly June 3, 2024
Q1 GDP figures revised lower as inflation steadies
The revisions to the Q1 US GDP figures were announced last week, and saw growth revised down to 1.3% annualized in the first quarter, compared to 1.6% in the first estimate. This was partly due to a significant downwards revision for consumer spending on goods from -0.4% in the first estimate and -1.9% in the second. This is a noteworthy development from a real estate perspective as it may indicate weaker leasing demand ahead for retail. The growth rate for investment in equipment, which is a useful measure of whether firms are expanding, was revised from 2.1% to 0.3%. This suggests businesses are being relatively cautious when deciding on whether to invest in new machinery, computers, and vehicles. Overall, a downwards revision was expected, yet it is encouraging that the rate of GDP growth remained well above zero.
Last week’s other big news story was PCE Price Index inflation, the Federal Reserve’s main benchmark for inflation, which remained unchanged at 2.7% in April. Core PCE inflation also levelled out at 2.8%. A single month of inflation steadying will not change the Fed’s position on interest rates, although had price growth increased it would certainly have caused financial market volatility; so the news is a welcome development. However, the Fed rate setters will want to see inflation moving back towards 2.0% over several months before considering cutting the Funds rate. We also believe the general election makes a summer reduction a difficult step for the Fed. Consequently, we are still forecasting the Fed Funds Rate to remain unchanged until the November policy meeting, which is when we are expecting the first cut.
This week sees jobs market data released, covering job quits and non-farm payrolls. Given the slowdown in GDP, we believe demand for workers has probably slowed further in recent months, so we are forecasting the jobs data to weaken. Overseas, the Eurozone’s central bank, the ECB, will make its interest rate decision on Thursday, and we are forecasting a 25 bps cut – something which could increase speculation on when the Fed may start cut rates.
Things to watch for this week
Tuesday, June 4
JOLTS Job Quits, April
Previous: 3.3m
Forecast: 3.2m
With the economy slowing we are predicting a reduction in the number of people quitting jobs, as high interest rates cause the employment market to decelerate.
Thursday, June 6th
ECB Rate Decision, June
Previous: 4.50%
Forecast: 4.25%
While inflation recently increased in the Eurozone, guidance lately from the ECB has suggested that they are moving towards a 25 bps cut. Consequently, we are predicting a reduction to 4.25%.
Friday, June 7th
Non-farm Payrolls, May
Previous: 175k
Forecast: 155k
Setting aside a strong increase in March, growth in payrolls has been decelerating in 2024, and we expect the trend to continue in the May numbers.