Mixed messages from the first-quarter GDP
By Joe Higgins, Quest 4 Quality
- Q1 gross domestic product was up 1.6%, missing expectations of 2.5%
- Mortgage rates have surpassed 7%, putting a damper on sales of existing and new homes
- Rising inflation reduces the chances that the Fed will lower interest rates this year
Gross domestic product (GDP) in the first quarter was up 1.6% at an annualized rate, as consumers are finally beginning to reduce spending in the face of high interest rates.
According to the report by the U.S. Bureau of Economic Analysis (BEA), GDP was down significantly from the prior quarter’s 3.4% growth rate, which itself was the worst performance since the first quarter of 2022.
We knew there would be a deceleration from the second half of last year, but not by this much. Government and consumer spending decreased, pushing GDP well below expectations of 2.5% in Q1. Remember that this is the first estimate and could likely be increased in this report’s second or third iteration.
One thing we know is that after 11 interest rate increases over the past 24 months, we are finally seeing a slowdown in growth, something that we had been expecting; however, by all other key indicators, the economy’s future still looks stable.
With job growth being the star of this show, 161 million Americans are working, creating higher wages and allowing consumers to go out and spend their hard-earned dollars. An economic downturn may be positive as it could help lower inflation, and the Fed can finally get on the path to cutting interest rates.
It has been over three years since the 2020 recession, and today the economy has beaten all expectations for growth. Wages are increasing faster than inflation. Savings accounts are earning upwards of 5% or more. Unemployment is below 4%, which has only happened four times in the past 74 years. The recent stock market gains over the past three years have increased the wealth effect for consumers, who feel better about their spending because it is backed up by surging 401(k)s and IRAs. In fact, Fidelity reported recently that there is a record number of retirement account millionaires in today’s economy. It is like having record home equity levels, another feature of good times.
The only problem with the wealth effect is that service inflation is way up because Americans are traveling, going out to ball games, spending in restaurants and possibly forcing the Fed to become more aggressive in slowing down the economy. In other words, it jeopardizes rate cuts and leaves us with high interest rates.
That brings me to mortgage rates, which are the highest since the 1980s. This has put a damper on the housing industry. When you think about it, the rising rates did not slow spending, employment, confidence or GDP over the past three years. All these indicators are inflationary, but inflation has cooled from 9.1% in June 2022 to 3.5% today.
The only thing the Fed has impacted is mortgage rates; they spiked at one point to 8.5%. The largest sector for our business is housing, and we need a robust market that is turning homes around and allowing consumers to upgrade their appliances, furniture and electronics. Today, a 30-year mortgage is just over 7%, and without any rate cuts we are sure they will not go below 6% this year.
This is a twofold problem: existing homeowners enjoying a low-rate mortgage will not put their homes on the market, creating a severe shortage. Second, buyers cannot afford the prices of new homes, especially since mortgage rates are so high.
Bottom Line
Yes, consumer savings are down substantially, credit card debt is over $1 trillion, the average balance on a card today is $6,047 and interest payments are impacting spending and will continue to do so.
Consumer spending will continue to slow, as will economic growth. There will not be a recession and the Fed’s chances of cutting rates are getting smaller.
Ask yourself this question: Where would the economy be if the Fed were not aggressively trying to slow it down by raising interest rates? The fact that they are not cutting rates suggests we are in decent shape.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.
