6/28/24 - US Economic Review: Consumer Caution and Moderating Growth

Economic data was plentiful this week, with results reflecting a cautious consumer and moderating growth. The Chicago Fed National Activity Index (CFNAI) increased to 0.18 in May from -0.26 in April, surpassing consensus expectations. However, the three-month moving average fell to -0.09 in May from -0.05 in April, indicating below-trend growth expectations for the economy. The third and final estimate of first quarter GDP came in as expected with growth up 1.4%, a small upward revision from 1.3% in the second estimate. Notably, the personal consumption expenditures component was revised down substantially to +1.5% in the final estimate from +2.0% in the second estimate. Weaker growth in consumer spending was offset by upward revisions in other major categories, particularly gross fixed investment. The Atlanta Fed’s GDPNow forecast for second quarter growth was also revised down to 2.2% from 3.0%.

The Conference Board's Consumer Confidence Index for June fell to 100.4 from 101.3 in May. While the present situation component rose marginally, consumers are less optimistic about future expectations for business conditions and potential income increases. On the other hand, the University of Michigan Consumer Sentiment Index came in higher than expected at 68.2 in the final June report, up from the preliminary 65.6 reading. Inflation expectations remained anchored with both the 1-year and 5-year expectations falling marginally to 3.0%.

The market digested several data points on the housing market this week. The S&P CoreLogic Case-Shiller 20-City Home Price Index reported a higher-than-expected 7.2% year-over-year increase in April versus March's upwardly revised 7.5% increase. San Diego continues to lead the country with 10.3% year-over-year price appreciation in the latest month. Although gradually improving, limited inventory continues to support higher home prices. Sales of new single-family homes declined 11.3% in May to 619,000 at a seasonally adjusted annual rate and dropped 16.5% year-over-year. The National Association of Realtor's Pending Home Sales Index declined 2.1% to a record low of 70.8 in May after an unrevised 72.3 in April. Mortgage rates around 7% continue to impact affordability.

This week’s highlight, the closely watched Personal Consumption Expenditures Index (PCE), decelerated in May as expected. The headline PCE deflator was unchanged in May from April versus up 0.3% in the prior month. Year-over-year, the PCE deflator rose 2.6%. The Core PCE deflator (the Fed’s preferred gauge) increased 0.1% in May from the prior month versus up 0.3% in April. The Core PCE deflator also rose 2.6% year-over-year. Although a clear trend has not materialized yet, a continued string of moderating inflation data should bolster the Fed’s case for lower interest rates later this year. As the Fed continues to balance the dual mandate of maximum employment and stable prices, committee members will be watching closely for any warning signs of potential weakness in next week’s labor report, the key economic release in the July 4^th holiday week.

Next Week:

S&P Global US Manufacturing PMI, Construction Spending, ISM Manufacturing, JOLTS Job Openings, Ward Total Vehicle Sales, MBA Mortgage Applications, Challenger Job Cuts, ADP Employment Change, Trade Balance, Jobless Claims, S&P Global US Services PMI, S&P Global US Composite PMI, Factory Orders, ISM Services Index, Durable Goods, Orders, FOMC Meeting Minutes, Labor Report

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The Chicago Fed National Activity Index is a monthly index designed to gauge overall economic activity and related inflationary pressure. The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The indexes are constructed to summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component.

The S&P Corelogic Case-Shiller home price index tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the nation.