U.S. economy remained resilient in first quarter amid signs of future softening

REAL ECONOMY BLOG | March 26, 2024

Authored by RSM US LLP

The American economy continued to show resilience in the first quarter though signs of softening in the future emerged, according to data on durable goods and consumer confidence released Tuesday.

In perhaps the most significant development on inflation, housing prices, a sticking point in the effort to restore price stability, continued to stabilize.

Taken as a whole, the data is not likely to change the Federal Reserve’s course on monetary policy, with the central bank likely to hold rates steady at its May meeting.

But if the data continues to point toward a cooling economy, the Fed will be more likely to follow through on its intent to cut rates three times this year—a move that should be sufficient to keep the economy growing and inflation under control.

Capital goods

Business spending dropped by 0.4% in February, according to the Commerce Department’s core capital goods shipment data, which excludes defense and aircrafts. But the two-month average remained at a 0.2% increase on a monthly basis, or 2.4% on an annualized basis.

That residual strength should support the investment component of gross domestic product in the first quarter as shipments are a proxy for nonresidential investment.

The 0.7% rebound in orders for core capital goods did not help clear the outlook for future investment as January’s data was revised downward 0.4% from unchanged. That revision brought the three-month annualized pace to a drop of 0.8% for the second month in a row.

For the March data, the bar for solid future investment growth should be much lower now given the rebound in February.

Because the current outlook contrasts with the improvement in capex spending as tracked by the Federal Reserve regional surveys and our proprietary RSM US Middle Market Business Index survey for the first quarter, we think there is room for business orders for core equipment to increase further.

Consumer confidence

In a separate report from the Conference Board, consumer confidence fell slightly to 104.7 in March from a downwardly revised 104.8 previously. The index paints a similar picture to capital goods: The current sentiment subindex is rising while future sentiment is deteriorating.

For the time being, the job market remains strong, according to the survey’s labor index, which grew to 32.2, the highest since last July. But future employment looks softer as respondents expect fewer jobs to be available in the next six months.

That softer outlook is aligned with our expectation that the labor market will come into more balance in the second half of the year.

The median inflation expectation remained unchanged at 4.3%, although the average increased to 5.3% from 5.2%, likely because of a rebound in inflation, especially gasoline, over the past three months.

Despite the slight drop in confidence, consumers signaled more inclination to buy cars and homes over the next six months because of stable interest rates, while plans to buy major appliances plunged.

Housing prices

Housing prices continued to stabilize in January. Prices dropped by 0.1% on a monthly basis, according to the Federal Housing Finance Agency, while they rose by only 0.14% in the S&P CoreLogic 20-city index.

While the year-ago data from S&P CoreLogic remained above 6%, in the past three months, price growth stayed at 0.2% on average, a significant improvement for the inflation front.

Lower demand for new homes amid increasing supply that is reaching near pre-pandemic levels has helped prices remain largely under control.