Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Today, we break down the depressing first quarter GDP report, and present some good news on housing.
Economic Growth Weaker than Expected in 1Q24
When you first read it, that headline might not seem that bad, or might even be a good thing. We all want the Fed to start cutting rates, but they keep pointing out how strong the economy is. Wouldn’t the fact that GDP growth was just 1.6% in the first quarter—when economists were expecting 2.4%—make the Fed more likely to cut rates this year? Also worth noting is the 1Q24 growth rate is the lowest since 2Q22 and follows growth of 4.9% in 3Q23, and 3.4% in 4Q23.
If it were only that simple. While the focus of this report is typically on the headline GDP number, there is another piece of data in there that has become more important these days. That’s right, it’s our good friend the core personal consumption expenditures price index, or core PCE. This measures changes in prices for goods and services but excludes food and energy prices because they can be very volatile.
As you regular readers already know, core PCE is the Fed’s favorite measure of inflation, as it is based on more comprehensive data than the consumer price index. Their goal is to get it down to a 2% annual growth rate, which has proved difficult over the past few months. After increasing at exactly a 2.0% rate in the third and fourth quarters of 2023, the core PCE index jumped to 3.7% in 1Q24.
The stock and bond markets reacted quickly to this news, as the report was a double shot of bad news. When economic growth is declining and inflation is rising, people start to worry about stagflation. But don’t worry, I’m not afraid of stagflation for two reasons:
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There are three requirements for stagflation: declining economic growth, rising inflation, and an increase in unemployment. The unemployment rate is currently 3.8%, so there is no noticeable increase there yet. And with almost 9 million unfilled jobs out there and very low levels of jobless claims, there’s no reason to expect a significant increase in unemployment anytime soon.
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Stagflation hasn’t been an issue in the U.S. since the 1970s.
Well, that’s enough bad news. Let’s turn to the housing market for some good news.
Pending Home Sales up 3.4% in March
Pending home sales, which are measured when contracts are signed, rose 3.4% last month and had their “best performance in a year” according to NAR. Economists were expecting a 0.3% decline, so this data is much better than expected.
What’s most impressive about this gain is that it happened as mortgage rates crossed 7% for the first time since November. The big takeaway is that homebuyers are accepting that higher rates will be around for a while and going forward with their purchases.