The US economy is still growing, and the job market appears to be solidly underpinned by low unemployment, according to the latest GDP and unemployment benefit claims.
On paper, the second estimate of March quarter GDP, released on Thursday, was weaker than expected, with an annual rate of 1.3%, down from the first estimate of 1.6%. This figure was more than half as strong as the 3.4% rate seen in the final quarter of 2023.
While it was the weakest quarterly growth since the depths of the pandemic in 2022, the picture was distorted. The reality is that the economy remains pretty well-placed, even though there are clear signs of growing strains on consumers, such as rising credit card debts and arrears, along with the growth in cheaper fast food menus and rising discounts on new cars.
However, the weaker second estimate was mainly due to two factors: a surge in imports and a fall in business inventories. Imports subtracted more than 1 percentage point from the March quarter’s growth, and the drop in business inventories took off nearly half a percentage point from GDP.
Inventories tend to fluctuate from quarter to quarter (as we know here in Australia), and the fall will be reversed in the coming months as businesses restock into the northern summer and fall (autumn). That will add to growth later in the year.
Consumer spending, which accounts for about 70% of US economic growth, slowed to a 2% annual rate, down from 2.5% in the first estimate and from rates of over 3% in the previous two quarters.
Spending on goods such as appliances and furniture fell at a 1.9% annual pace, the biggest such quarterly drop since 2021, a sign that hard-pressed consumers are cutting back on discretionary spending, which is happening not only here but also in other developed economies.
However, services spending rose at a healthy 3.9% rate, the strongest in nearly three years. Meanwhile, a small rise in business investment, led by housing, software, and research and development, cushioned the fall elsewhere and added more than 1 percentage point to first-quarter annual growth.
The high level of spending on services helps explain the stability of services prices and inflation, according to some US economists. But others say it’s a sign of the higher spending forced on consumers by the rising cost of services such as insurance and travel.
National Accounts quarterly price measures showed a small rise to around 3.3% to 3.6%, still well above the Fed’s 2% target and providing no joy for investors or economists worried about the stickiness of prices.
A real-time GDP measure run by the Atlanta Fed suggests GDP is currently around 3% to 3.5%, which, if sustained, would mean a rebound in growth this quarter.
Tonight, the monthly PCE price data for April will be released, and no real change is forecast. Core PCE prices are forecast to have risen 2.8%, up from 2.7% in March.
Meanwhile, the number of Americans applying for unemployment benefits ticked up last week, but layoffs remain historically low despite lingering inflation and high interest rates.
Jobless claims for the week ending May 25 rose by 3,000 to 219,000, up from 216,000 the week before, according to data from the US Labor Department released Thursday.
The four-week average of claims, which gives a less volatile view of the figures, also rose modestly to 222,500, an increase of 2,500 from the previous week.
The May jobless figures are out in a week’s time, and expectations are for another sub-200,000 outcome, perhaps as low as 150,000.
April saw 175,000 jobs added for the month, the lowest in six months and a sign that the labor market may be finally cooling. The unemployment rate inched back up to 3.9% from 3.8% and has been below 4% for 27 straight months, the longest such streak since the 1960s.
Job vacancies fell to a three-year low of 8.5 million in March, but they are still well above any monthly reading prior to the pandemic.