Fed Meeting Poses Pivotal Test for Market as Slowing GDP Meets Stubborn Inflation
A new round of nowcasts continue to estimate that US economic activity will downshift in next month’s release of first-quarter GDP data. Today’s revised estimate is based on the median for a set of nowcasts compiled by CapitalSpectator.com.
Output for the January-through-March period is currently projected to soften to a 2.1% increase (seasonally adjusted annual rate). The estimate reflects a substantially softer rise vs. Q4’s strong 3.2% advance, which in turn marks a downshift from Q3’s red-hot 4.9% increase, according to government data.
US Real GDP Change
Today’s revised Q1 estimate was essentially unchanged from the previous Q1 nowcast (published on Mar. 7). At this late date in the current quarter, the odds are relatively high that the current median estimate is a reasonable guesstimate for the actual GDP data that the Bureau of Economic Analysis will publish in late-April.
GDP rising at roughly a 2% pace marks another slowdown from recent quarters, but if the current nowcast is correct it suggests that recession risk remains low. The question is whether the slowdown persists into Q2 and beyond.
Given the expected deceleration in growth on tap for Q1, the economy may be flirting with a tipping point for recession later in the year. It’s premature to make such a forecast with high confidence, but it’s a scenario that’s increasingly plausible, albeit speculatively so for now.
Yesterday’s release of retail sales numbers for February aligns with the possibility that even softer growth is coming. Although spending rebounded last month after January’s steep decline, the bounce was lower than expected.
“The modest rebound in retail sales in February suggests that consumer spending growth slowed in early 2024,” says Michael Pearce, Oxford Economics deputy chief US economist.
US Retail Sales
Reviewing retail spending on a year-over-year basis provides a clearer view of the softer growth profile. The pace edged up to 1.5% last month vs. the year-earlier level, but that’s close to the slowest increase in the post-pandemic recovery.
Advance Retail Sales
Despite emerging signs of slowing growth, relief for the economy in the form of interest-rate cuts may be further out in time than recently expected, due to the latest round of sticky inflation news this week.
“When the Fed is contemplating a series of rate cuts and is confronted by suddenly slower economic growth and suddenly brisker inflation, they will respond to the new news on the inflation side every time,” says Chris Low, chief economist at FHN Financial.
“After all, this is not the first time in the past couple of years consumers have paused spending for a couple of months to catch their breath.”
