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Global Weekly Economic Update | Deloitte Information
Real business fixed investment increased at a rate of 2.9%. This included a 2.1% increase in business equipment (the first increase in three quarters, fueled by investment in information technology and offset by a sharp drop in investment in transportation equipment), a 0.1% decline in structures and a 5.4% increase in intellectual equipment. ownership (which includes software and R&D). Real investment in residential properties increased at a rate of 13.9%. On the other hand, a decline in business inventories reduced real GDP growth by 0.35 percentage points. The increase in investment in information technologies was the strongest since the first quarter of 2022. This bodes well for demand for consulting services.
However, although real exports of goods and services increased by 0.9%, imports increased by 7.2%. This means that net exports made a negative contribution to GDP growth. Furthermore, while state and local government purchases increased at a rate of 2%, actual federal purchases fell by 0.2%.
Although real GDP grew more slowly than expected in the first quarter, the main components performed very well. Final sales to private domestic buyers (which exclude the impact of trade, government and stocks) increased at a rate of 3.1%. This was the second fastest growth rate since the fourth quarter of 2021, when the economy was recovering from the pandemic recession. Thus, the news about economic growth remains relatively good. Furthermore, news reports suggest that the United States continues to be a prime engine for global economic growth. Still, the weak headline number evidently spooked investors.
- The US government also Published data on household income, consumer spending and the Federal Reserve’s favorite measure of inflation. While the news on household spending was good, investors focused mainly on inflation numbers.
Specifically, it was reported that the personal consumption expenditures deflator (PCE deflator) rose 2.7% in March from the previous year, up from 2.5% in February. This was the first acceleration of the index since September 2023. However, when volatile food and energy prices are excluded, the core PCE deflator rose 2.8% in March compared to the previous year, the same as in February. Underlying inflation has remained relatively stable for four months, suggesting that the previous slowdown has been halted.
The problem of inflation continues to be with services, which require intensive labor. Thus, the problem is the tight labor market, which is generating significant wage gains. Specifically, prices for durable goods fell 1.9% year-on-year, while prices for non-durable goods rose just 1.3%. This included food, which rose just 1.5%. However, service prices rose 4% year-on-year, virtually unchanged over the past five months.
As such, it is not surprising that future prices are implying a 60% probability that the Fed will begin cutting rates in September. Furthermore, they only imply a 50% probability of a second rate cut in 2024. This is a stark change from just a few months ago, when investors expected the Fed to start in June and deliver three to four cuts in 2024. The change in investor expectations reflects the persistent tightness of the labor market and the strong underlying demand in the economy. Investors evidently believe that the Fed will not ease monetary policy while the economy is so strong and underlying inflation is stagnant.
Meanwhile, the US government also reported that although real personal disposable income increased 0.2% from February to March (the fastest growth since December), real personal consumer spending increased 0.5%, the same as in the previous month. Therefore, families continue to reduce savings to allow for strong increases in expenses. The personal savings rate fell from 3.6% in February to 3.2% in March.
- The Federal Reserve intends to keep interest rates high for longer, in large part because the US labor market has remained unusually tight, thus generating wage gains that drive inflation in services. So any indication that the labor market is easing would be good news for the Fed. The latest data suggested that tension in the job market is decreasing. The government reported a sharp slowdown in employment growth in April, although this remains above the expected long-term trend. Furthermore, wage growth in April declined. Let’s look at the data.
O US government report on employment includes results from two surveys: one is a household survey and the other is an establishment survey. The establishment’s research found that, in April, 175 thousand new jobs were created. This was the slowest job growth since October 2023. On the other hand, March growth was revised upwards to 315,000, an unusually strong number. One month doesn’t make a trend. However, if the slower growth observed in April persists in the coming months, it will likely be a sign of an easing of tension in the labor market. This, in turn, could influence the Federal Reserve’s decisions.
By industry, there was very modest growth in employment in goods-producing industries (mining, construction, manufacturing). There has been a decline in employment in information as well as professional and business services and there has been very modest growth in financial services, leisure and hospitality and government. Moderately strong growth occurred in wholesale trade, retail trade and transport. But the strongest growth has been in health care and social assistance. Overall, April was a relatively weak month for job growth.
The establishment survey also includes data on wages. The report states that in April, the average hourly earnings of all workers increased by just 3.9% compared to the previous year, the smallest increase since March 2021. So wage pressure is evidently easing. However, it remains too high given the Fed’s 2% inflation target. If productivity increased quickly, companies could raise wages without raising prices, since they would get more from each worker. However, as indicated below, productivity growth stagnated in the first quarter.
Finally, the household survey indicated that, in April, employment grew more slowly than the active population, thus leading to an increase in the unemployment rate to 3.9%, still a very low level.
- The US government also reported on labor productivity in the first quarter. Remember that, in the three most recent quarters, labor productivity (production per hour worked) increased rapidly. This was useful in reducing inflation. It also contributed to strong economic growth. The increase in productivity in 2023 was probably related to business investments in technologies that save and increase labor, a response to the restrictiveness of the labor market.
However, in the first quarter of 2024, labor productivity has almost stagnated. Productivity increased by just 0.3% from the fourth quarter of 2023 to the first quarter of 2024. This followed strong growth of 3.5% in the previous quarter. The result was that, as wages continued to rise, unit labor costs (UTC) accelerated sharply in the first quarter. ULC denotes the labor cost to produce a unit of output. It is calculated as real hourly earnings (adjusted for inflation) divided by productivity. Thus, if productivity increases at the same rate as real wages, then ULC remains unchanged. This implies that companies do not need to increase prices in line with wage increases.
In the second half of 2023, ULC remained largely unchanged as productivity gains offset real wage gains. However, in the first quarter, CUT increased by 4.7% compared to the previous quarter. Furthermore, CUT increased faster in services than in manufacturing. This is not good news for suppressing inflation, especially given that most of the remaining inflation comes from the services sector.