The Economy. On balance, the economic data over the past few weeks point to slower growth ahead. According to the latest GDP Now report from FRB Atlanta, 24Q2 real GDP is expected to rise 3.3%. That’s down from nearly 4.0% two weeks ago. FRB New York’s Fed Now tracker pegs 24Q2 real GDP growth at 2.2% as of May 3, down from 2.7% as of April 26. The consensus of Blue Chip forecasters (via the Atlanta Fed) projects 24Q2 GDP growth of 1.4% to 2.9%.
The latest Philly Fed Survey of Professional Forecasters predicts real GDP growth of 2.5% in 2024 and 1.9% in 2025, both up 0.1% from its previous report.
Economic Activity. On balance, the U.S. economy remains resilient, with some signs of underlying weakness.
Personal income rose by 0.51% in March and at an annualized three-month average (A3MoAvg) rate of 7.5% (up from 6.8% in February). The A3MoAvg growth of employee compensation was 7.3%, higher than February’s 6.4% rise.
Excluding employee compensation, the other categories of personal income include proprietors’ income, rental income, receipts on assets and (governmental) transfer receipts. These account for about 38% of total personal income. Collectively, personal income from these sources increased 0.29% in March and 8.0% on an A3MoAvg basis, moderately higher than the A3MoAvg rise in employee compensation.
Once again, taxes were higher for the quarter, so the A3MoAvg growth rate of disposable personal income was 4.8%, less than the increase in total personal income. Real disposable personal income increased 0.5% on the same basis.
Personal consumption expenditures have kept pace with income. They were up 0.84% in February with an A3MoAvg rate of 7.3% The personal savings rate was 3.2% in March, down from 3.6% in February and the lowest since October 2022.
Payroll Employment Growth Slowed in April, as Did Wage Growth. BLS reported that payroll employment increased by 175,000 positions in April, well above the consensus estimate of 240,000. Household employment was estimated to have risen by 113,000, its second consecutive monthly gain following three consecutive months of declines. The unemployment rate ticked up to 3.9% from 3.8% in March. The labor force participation rate was unchanged at 62.7%.
April’s average hourly wage increased 0.20% to $34.75, slower than March’s 0.35% increase. On an A3MoAvg basis, the average hourly wage increased 2.8%, down from 4.0% in March. Average weekly hours slipped a tenth to 34.3; unchanged from last year’s figure. Thus, average weekly earnings rose 3.9% year-over-year and 4.0% on an A3MoAvg basis.
Payrolls estimates for February and March were revised downward by a total of 56,000 positions. Together with the tepid 34,000 increase in household employment, the data provided more evidence that the labor market is cooling.
Over the past twelve months, payroll employment has increased by an estimated 2.81 million positions; while household employment is up by 613,000. The gap between payroll and household employment increases has widened sharply this year. Most of this, I believe, is attributable to an increase in part-time positions, including both people who were previously unemployed or self-employed and those taking second or even third jobs.
The data is difficult to parse precisely because the estimates for the various subcategories do not tie exactly to the totals. Furthermore, the data for the subcategories is volatile. For example, part-time workers are estimated to have declined by 914,000 from March to April or by 3.2%; while full-time workers are estimated to have increased by 949,000 positions or 0.7%. Both implied one-month increases seem unrealistically high.
Nevertheless, I believe that the overall data supports a conclusion that gains in part-time employment have been a significant driver of the strength of the payrolls data. That suggests that the employment gains have not been nearly as strong as indicated by the headline payrolls figures.
Readings for unemployment claims (from the Dept. of Labor) have remained fairly steady for quite some time and April’s figures were no different. However, job cut announcements, as estimated by Challenger Gray & Christmas, decreased 28% in April to 64,789 from 90,309 in March. So far this year, announced job cuts are down 4.6% vs. 2023. Even so, CGC expects that increases in labor costs will cause companies to slow their hiring and eventually reduce their employment levels.
The ISM’s April Manufacturing PMI was 49.2, down 1.1 PP from 50.3 in March. The Index slipped below the neutral level of 50, signaling a return of the manufacturing sector to contraction, after only one month of expansion, the first in a year-and-a-half. Orders moved back into contraction territory, while April’s expansion of production was less robust. Anecdotal evidence suggests that on balance manufacturing activity remains surprisingly strong, but several respondents said that there has been a steady but small decline in order activity over the past year which they expect to continue.
Industrial production rose 0.4% in March, matching February’s revised increase; but it decreased 1.8% in 24Q1. For the month, gains of 0.5% in manufacturing and 2.0% in utilities were partially offset by a 1.4% decline in mining (mostly oil & gas). Final products production increased 1.0%, led by a 1.2% rise in consumer goods. Non-industrial supplies production was up 0.2%; but within that category, construction was down 1.0%, its fifth decline in the past six months. Year-over-year, industrial production was flat.
Railroad traffic YTD through May 4 increased 2.1%, with carloads declining 4.8%, but intermodal units rising 8.7%. The decline in railroad carloads has been due entirely to a reduction in coal, as a result of warmer winter weather and the ongoing shift by utilities to other fuels. Excluding coal, railroad carloads were essentially flat YTD, but up 2.0% in April, with increases in chemicals, petroleum products, autos and grains. Recent increases in intermodal volumes, which had been attributed by AAR to strength in consumer spending, increasing port activity (due to problems at the Panama Canal) and a reduction in inventory destocking, have been moderating. Intermodal volumes were flat for the week ended May 4.
Existing home sales were reported to have fallen 4.3% in March (from February) to an SAAR of 4.19 million units, according to the National Association of Realtors (NAR). Against the prior year, sales decreased 3.7%.
The median price of an existing home sale was estimated to have risen by 2.5% to $393,500 (from February) and 4.8% YOY, which is the ninth consecutive monthly YOY price increase. The average price increased 3.5% month-to-month and 7.1% year-to-year.
Unsold inventory of 1.11 million units increased 4.7% month-to-month and 14.4% year-to-year. The supply of inventory on the market was estimated at 3.2 months of sales, higher than the recent average of 2.9 months.
NAR Chief Economist Lawrence Yun attributed the decline in the pace of existing home sales to the persistence of high mortgage rates. Even so, Mr. Yun expects that interest rates will fall long-term, helped along by decreasing apartment rents, which he expects will serve to reduce inflation. (However, owners’ equivalent rent is much more consequential in the determination of shelter costs. Although house price appreciation is starting to moderate, the year-over-year increases are continuing at mid-single digit rates.)
Mr. Yun forecasts existing home sales of 4.46 million in 2024, up 9% from 2023, and 5.05 million in 2025, up 13.2%. In support of his forecast, he points out that existing sales are tracking near 30 year lows, even though the population has increased by 70 million people or more than 25%.
The NAHB’s Housing Market Index, a measure of builder sentiment about current and future sales, held steady at 51 in April from March. That is surprising given the rise in mortgage rates since the March Index was released. Among its components, sentiment about the pace of current sales rose one point (from March) to 57. Buyer traffic also added a point to 35. However, the outlook for sales 6 months out decreased from 62 to 60.
The April readings on housing starts, permits and new home sales will be released later this month.
The Fannie Mae Home Purchase Sentiment Index (HPSI) was unchanged in April at 71.9. Only 20% of consumers think that now is a good time to buy a home; while 79% think that it is a bad time. Sentiment has improved since the end of October, however, when 15% said it was a good time to buy and 85% said it was a bad time. The last time such sentiment was balanced—i.e. there was a roughly equal split between good and bad sentiment—was October 2021, as the economy was beginning to come out of the pandemic and before the Federal Reserve began raising interest rates.
While buy sentiment remains negative, more consumers think that now is a good time to sell. In the April survey, 67% indicated that it is a good time to sell, while 32% think it is a bad time. Favorable selling sentiment has increased 10 percentage points since the beginning of the year.
Beyond the buy-sell decision, more consumers—42%, up 3 PP from March and since year-end 2023—believe that house prices will continue to rise. Yet, the balance between those thinking that mortgage rates will rise and those expecting a fall has tipped toward higher rates from neutral at the beginning of the year. 76% of consumers are not concerned about job loss and household income growth expectations are mostly neutral, with a small net percentage expecting much higher income gains.
Fannie Mae’s Chief Economist Doug Duncan said that the levelling off or plateauing of the HPSI is a sign that most consumers are maintaining their “wait and see” approach to the housing market. The improvement in sentiment since October was driven by expectations that mortgage rates would begin to decline sometime in 2024. Since the start of the year, mortgage rates have instead moved higher and yet buying sentiment has still improved slightly, while selling sentiment has improved a lot. Fannie Mae thinks that this suggests that consumers are adjusting to the new realities of the mortgage market.
The Conference Board’s Consumer Confidence Index fell 6.1 points to 97.0 in April. The present situation component declined from 146.8 to 142.9, while the expectations component decreased 7.6 points to 66.4. The drop was most evident in the outlook for employment; but optimism about future business conditions and incomes also declined.
Inflation Has Flared Up Again. The personal consumption expenditures (PCE) price index increased 0.32% in March, little changed from 0.34% in February. The A3MoAvg increase in headline PCE was 4.4%, up from 3.6% in February. The A3MoAvg rate for core PCE, which excludes food and energy, was also 4.4%, up from 3.7% in February. Increases in energy goods and services have been a major catalyst in the acceleration of PCE inflation, but increases in services costs, including housing, have also been significant. The pick-up in PCE inflation is consistent in direction with the CPI, but lower in magnitude.
Changes in commodity prices were mixed in April and so far in May. Crude oil and its derivatives, which had risen steadily in 24Q1, eased in April and at a faster pace so far in May. Natural gas has bucked this trend, falling sharply in 24Q1 but rebounding sharply in April and May. Agricultural commodity prices are generally on the rise. Likewise, precious metals are up meaningfully, as evidenced by the 16.3% advance in the price of gold over the past few months.
April CPI-U increased 0.39%, down from 0.65% in March. The A3MoAvg increase eased to 6.8% from 7.5% in March. April’s gain was driven mostly by a jump in energy commodity costs and a still high increase in shelter costs (though the increase in shelter contributed the least to monthly headline CPI inflation since October 2023). With the cost of oil receding, I expect a further easing of CPI inflation in June.
Fixed Income markets declined on average by about 2.5% in April, as measured by the broad-based indices, such as the Bloomberg Aggregate and ICE US Broad Market. By sector, U.S. Treasurys & Agencies declined 2.3%, mortgages dropped 2.9%, investment grade corporates were down 2.3% and high yield corporates slipped 1.0%.
Longer duration securities once again underperformed the broad indices. Among U.S. Treasury ETFs, the 20+ Year (TLT) fell 6.5%; the 7-10 year (IEF) dropped 3.1%, the 3-7 year (IEI) decreased 1.7% and the 0-3 year (SHY) slipped 0.4%.
Since the end of the month, however, the fixed income markets have rallied. 10-year Treasury yields have fallen in seven of the past nine trading sessions and by a total of 20 bp since peaking at an intra-day high of 4.70% on April 25. Broad market fixed income indices have risen 1.4% so far in May. By duration, the longer-maturity bonds which led on the way down are now leading the way in the recovery.
The Treasury Yield Curve. U.S. Treasury yields rose sharply in April, but have moderated so far in May. Yields across the 1-year to 30-year maturity span jumped 44 bp on average in April, but have fallen 17 bp on average in May. The 10-year Treasury yield ended April up 49 bp to 4.69%, the highest since October, but it has since fallen back to 4.50%. Likewise, the 30-year Treasury yield increased by 45 bp in April to 4.79%, but eased 15 bp to 4.64% from April 30 to May 10.
According to the CME’s Fed Watch tool, market participants are now assigning a 91% probability that the target Fed Funds rate will remain unchanged at its June meeting (and a 10% probability of a 25 bp rate cut). By the end of 2024, however, they see a 35% probability of a 25 bp cut and a 53% probability of rate cuts of 50 bp or more. These implied rate forecasts are little changed from last month.
May 15, 2024
Stephen P. Percoco
Lark Research
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