Key Takeaways:
- Personal spending revised down to 1.5%, indicating softer consumer demand.
- Core capital goods orders dropped 0.6%, reflecting business investment challenges.
- Pending home sales fell 2.1%, highlighting the impact of high mortgage rates.
What Happened?
The US economy is showing signs of slowing down, driven by high interest rates and persistent inflation. Personal spending, a key economic driver, was revised down to an annualized 1.5% in Q1 from a previous 3.3%. Core capital goods orders and shipments also declined by 0.6% and 0.5%, respectively, in May.
The National Association of Realtors reported a 2.1% drop in pending home sales, the lowest level since 2001. The merchandise trade deficit widened to $100.6 billion, the largest in two years. Bill Adams, Comerica Bank’s chief economist, remarked, “The economy is operating in low gear in the first half of 2024 after above-trend growth in the second half of 2023.”
Why It Matters?
This data underscores the impact of the Federal Reserve’s high-interest-rate policy aimed at curbing inflation. With borrowing costs elevated, demand for consumer goods, homes, and business equipment is cooling. The Atlanta Fed’s GDPNow forecast has adjusted second-quarter growth down to 2.7% from an earlier 3%.
High mortgage rates around 7% are particularly straining the housing market, pushing contract signings for previously owned homes to record lows. For investors, these indicators suggest a cautious approach as economic growth slows and inflation pressures persist.
What’s Next?
Looking ahead, expect continued moderation in economic activity. Personal spending figures for May may show a slight rebound, but financial strain and weak labor demand signal slower growth. After-tax personal income rose just 1.5% in Q1, the smallest increase since 2022. Continuing jobless claims climbed to 1.84 million, the highest since 2021, indicating longer job search times.
Businesses are also likely to face ongoing challenges with high borrowing costs and a strong US dollar, which could further depress export demand. Monitor these trends closely, as they could influence market sentiment and investment strategies in the coming months.
