GDP revised downward – The Daily Tearsheet

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are down small.

GDP growth in the first quarter was revised downward from -1.4% to -1.5%, according to BEA. The PCE price index, which measures inflation was steady at 7%. Ex-food and energy, the PCE index was revised downward from 5.2% to 5.1%. Inventory and exports were the reason for the decline in GDP growth.

The FOMC minutes didn’t have much effect on the markets yesterday. Inflation remains too strong for the Fed’s liking and the Street is looking for 50 basis point hikes in June and July.

They discussed the negative GDP print in Q1 specifically.

Participants commented that after its rapid growth in the last quarter of 2021, real GDP had declined in the first quarter of this year, with net exports and inventory investment making large negative contributions to growth. They noted, however, that these volatile components tended to contain little signal about subsequent growth and that household spending and business fixed investment had remained strong in the first quarter. These advances and the further tightening of labor market conditions were judged consistent with significant underlying momentum in the domestic economy.

The Fed thinks that GDP growth remains solid, and that fiscal policy will act as a natural drag on the economy while the supply chain issues will get worked out. In addition, a few members thought there were signs that the pandemic-related restrictions on labor supply were easing. I take this to mean that many workers who were staying out of the labor market due to health fears are now re-entering the labor force. Of course inflation could have something to do with that as well.

The characterization of GDP growth as “solid” is somewhat contradicted by the latest GDP Now estimate out of the Atlanta Fed, which just revised its estimate downward from 2.4% to 1.8%. I suspect the putrid new home sales number had something to do with it.

Speaking of new home sales, pending home sales fell 3.9% in April, according to NAR. Year-over-year pending home sales are down 9.1%.”Pending contracts are telling, as they better reflect the timelier impact from higher mortgage rates than do closings,” said Lawrence Yun, NAR’s chief economist. “The latest contract signings mark six consecutive months of declines and are at the slowest pace in nearly a decade. The escalating mortgage rates have bumped up the cost of purchasing a home by more than 25% from a year ago, while steeper home prices are adding another 15% to that figure. The vast majority of homeowners are enjoying huge wealth gains and are not under financial stress with their home as a result of having locked into historically low interest rates, or because they are not carrying a mortgage,” Yun explained. “However – in this present market – potential homebuyers are challenged and thus may attempt to mitigate the rising cost of ownership by opting for a 5-year adjustable-rate mortgage or by widening their geographic search area to more affordable regions.”