The Independent Market Observer

Monday Update: Economy Contracts in the First Quarter

Posted by Sam Millette

This entry was posted on May 2, 2022 12:03:00 PM

and tagged In the News

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Monday UpdateLast week was a busy period for economic updates, with several important data releases that covered wide areas of the economy. The advanced estimate for first-quarter GDP growth showed that the economy surprisingly contracted to start the year, but the underlying data had some positive signs for growth ahead. This will be another busy week of updates, with highlights including business confidence, international trade, the results from the Fed’s May meeting, and the April employment report.

Last Week’s News

On Tuesday, the preliminary March durable goods orders report was released. Orders of durable goods increased 0.8 percent during the month, which was slightly less than the expected 1 percent increase. Core durable goods orders, which strip out the impact of volatile transportation orders, beat expectations, rising 1.1 percent against calls for a 0.6 percent increase. This better-than-expected result is a good sign for business spending and helps calm concerns of a potential slowdown in business investment following a 0.5 percent drop in core orders in February. This marked the best month for core orders growth since April 2021, which is an encouraging sign that business owners continue to invest in order to meet high levels of demand despite headwinds created by uncertainty and rising prices.

Tuesday also saw the release of the Conference Board Consumer Confidence Index for April. The report showed that confidence declined slightly from an upwardly revised 107.6 in March to 107.3 in April against calls for an increase to 108.2. Despite the modest miss against expectations, the index remains well above the lows we saw earlier in the pandemic, supported by the ongoing economic recovery and the strong job market. Consumer views on the current conditions for the economy dimmed, but expectations for the future improved as concerns around inflation moderated. The survey showed that consumers were more likely to plan big-ticket purchases, such as cars and appliances, in April, which is an encouraging sign for consumer spending. Additionally, plans for foreign travel saw a notable uptick during the month, which was another positive sign for future spending.

On Thursday, the advanced estimate of 2022 first-quarter GDP growth was released. The report showed that the economy surprisingly contracted during the first quarter, with GDP declining 1.4 percent on an annualized basis to start the year. This was down from the 6.9 percent annualized growth rate we saw in the fourth quarter and below economist estimates for a 1 percent increase. The surprise decline during the quarter was due, in large part, to international trade as a surge in imports during the quarter led to record trade deficits that weighed on headline growth. International trade detracted 3.2 percent from headline GDP growth during the quarter, and export growth paled in comparison to import growth to start the year. Despite the slowdown in headline growth, personal consumption improved. The report showed a 2.7 percent increase in consumption on an annualized basis, up from 2.5 percent in the fourth quarter. Looking ahead, economists expect to see a return to growth in the quarters ahead, supported by robust consumer demand and business investment.

We finished the week with Friday’s release of the March personal income and personal spending reports. Income and spending both increased more than expected during the month, and February’s results were revised upward. Personal spending rose 1.1 percent in March from an upwardly revised 0.6 percent increase in February and above estimates for a 0.6 percent increase in March. Personal income rose 0.5 percent in March following a 0.7 percent rise in February. This was better than economist estimates, which called for a 0.4 percent increase in income during the month. This now marks three straight months with increased spending and six straight months with rising incomes. While part of the increase in spending was due to higher prices, consumer demand was so strong that even inflation-adjusted personal spending increased more than expected in March. Spending growth to start the year has been well supported by the strong job market, which, in turn, has supported the solid wage growth we’ve seen in 2022.

What to Look Forward To

On Monday, the ISM Manufacturing survey for April will be released. This measure of manufacturer confidence surprisingly dropped from 57.1 in March to 55.4 in April against calls for an increase to 57.6. This is a diffusion index where values above 50 indicate growth, so this report showed continued expansion for the manufacturing industry despite the miss against expectations. The drop in the index was largely due to softer demand for manufactured goods, as the report showed the measure of new orders fell to its lowest level since May 2020. Hiring also showed signs of weakness during the month. All in all, this report showed that the recovery of the manufacturing industry slowed, but the industry is expected to improve in the months ahead.

On Wednesday, the March international trade balance report will be released. Economists expect to see the monthly trade deficit widen to its largest point on record, with forecasts calling for the trade deficit to increase from $89.2 billion in February to $97 billion in March. The previously released advanced estimate for the trade of goods showed the goods trade deficit widening from $106.3 billion in February out to $125.3 billion in March. An 11.5 percent surge in imports of goods during the month was more than enough to offset a 7.2 percent rise in exports. International trade was a major drag on overall economic growth in the first quarter; this was due, in large part, to the high levels of domestic consumer demand for goods and services that we saw to start the year. Looking forward, economists largely expect to see the trade deficit start to normalize in the months ahead, which, in turn, could help support overall economic growth.

Wednesday will also see the release of the ISM Services index for April. Service sector confidence is expected to improve during the month, with the index set to rise from 58.3 in March to 58.7 in April. As was the case with the manufacturing survey, this is a diffusion index where values above 50 indicate growth. If estimates hold, this would mark two consecutive months with improved service sector confidence following four months of declines. Service sector confidence suffered at the end of 2021 and the start of 2022 due to the surge in Covid-19 cases related to the Omicron variant. If we see more improvement in service sector confidence in April, it would signal that business owners are gaining confidence that the worst from the pandemic is largely behind us. Historically, improving confidence has helped support faster business spending, so any improvement in April would be welcome.

The third major release on Wednesday will be the FOMC rate decision from the Fed’s May meeting. Markets and economists expect to see the Fed increase the upper bound of the federal funds rate from 0.5 percent to 1 percent at this meeting. This anticipated 50 bp interest rate hike is part of the Fed’s response to high levels of inflation throughout the economy, as higher rates are used by the central bank as a way to slow the economy to combat rising price pressure. This will represent the second consecutive meeting with an interest rate hike, as the Fed started hiking rates with a 25 bp increase at its March meeting. Looking ahead, markets are currently pricing in an additional 10 rate hikes by the end of the year, including the 2 that are expected on Wednesday. Aside from the anticipated rate hike, the Fed is also expected to provide more details on its plan to reduce the size of its balance sheet. The central bank is expected to announce plans of reducing the balance sheet rapidly throughout the year and into 2023 to tighten monetary policy and combat rising prices. Fed meetings will continue to be widely monitored events throughout the year given the importance of monetary policy on markets and the economy.

We’ll finish the week with Friday’s release of the April employment report. The report is expected to show that 390,000 jobs were added during the month, down from the 431,000 jobs that were added in March. If estimates hold, this would mark 16 straight months of job growth, which highlights the impressively resilient recovery of the labor market over the past year. The unemployment rate is expected to remain unchanged at 3.6 percent, which would tie the pandemic-era low that was set last month. Average hourly earnings are expected to increase 0.4 percent during the month and 5.5 percent on a year-over-year basis, which would be largely in line with the wage growth we saw in March. Looking forward, economists expect to see job growth continue to cool in the months ahead, but slower growth is still growth and would be understandable given the low unemployment rate. The job market recovery has been impressive since the start of the pandemic and appears to be the major driver of the overall economic recovery. This report is expected to highlight the continued strength of the labor market to start the second quarter.

That’s it for this week—thanks for reading!

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