Assessing the state of the U.S. economy: slowdown signals amidst economic resilience

Services and manufacturing PMI

Businesses appear to be more pessimistic about the state of the economy, with the S&P saying, “Companies responded by scaling back employment for the first time in almost four years, with business confidence also waning to the lowest since last November.” Adding to this sentiment, Chris Williamson, Chief Economist at the S&P, said that companies are cutting payroll numbers at a rate not seen since the Great Financial Crisis (excluding the pandemic years). Finally, prices for raw materials continued to rise at the start of the second quarter, putting pressure on manufacturers. The persistence of the elevated inflation and high borrowing costs will weigh on the economy as we move into the spring and summer.

GDP growth coming in below expectations

GDP expanded at a slower-than-anticipated pace in the first quarter of the year, coming in at 1.60%, the weakest showing in almost two years, with a trade deficit and weaker inventory growth effectively capping the growth rate. Housing and manufacturing have also taken a hit due to the high borrowing costs mentioned above. The U.S. trade deficit in goods widened by 1.70% as well, the largest since last April. Exports of goods dropped by $6.10 billion, and imports fell $4.60 billion. The deficit subtracted 0.90 percentage points from the first quarter GDP growth, with economists expecting that trend to continue this year, reversing last year’s trend.

Despite a slower quarter, the details of the report indicate that the economy is on solid ground. The main driver of economic growth, consumer spending, rose at a rate of 2.50%. Over the past three years, steady consumer spending has led to strong growth. Adding to this more positive outlook, very few economists think that a recession is likely. Jobless claims have been stable, showing no signs of stress. Finally, pending home sales posted a larger-than-expected increase last month, even in the face of mortgage rates hovering around 7.00%. Pending home sales rose 3.40% in March, exceeding expectations that they would remain unchanged.

PCE shows sharply rising prices

The PCE Index rose 0.30% last month, per the government’s report this past Friday, with economists polled by the Wall Street Journal forecasting an increase of the same amount. With prices jumping again in March, the Fed’s preferred PCE Index is signaling that the progress on reducing inflation has stalled to some extent. The core PCE rate, which strips out food and energy, also increased by 0.30%. The yearly rate of inflation has climbed to 2.70% from 2.50%, showing fear within the markets that rate cuts are less likely to happen anytime soon. “Persistently disappointing dynamics in consumer prices are likely to lead Fed officials to look for a larger accumulation of evidence that points to inflation normalization before deciding to pull the trigger on rate cuts,” economists at TD Securities wrote in a commentary.

Corporates sensitive to oil prices should be on the lookout, as PCE data suggests that potential oil price shocks could be forthcoming due to instability in the Middle East. With imports, exports, and spending on manufacturing dropping, inventory management is going to be extremely important for corporates sensitive to these areas of the economy. Users of Chatham's proprietary exposure management technology prioritize efficient tracking of inventory data changes. Corporations benefit from the platform's timely insights, enabling informed hedging decisions and efficient trade execution.

Looking ahead

With the FOMC meeting coming on Wednesday, many are concerned that a rate hike may be on the table. However, most expect that rates will be held steady, at a target of 5.25%–5.50%. Next week we will be hearing from New York Fed President Williams and Fed Governor Cook, along with the publishing of the U.S. Monthly Federal budget.