Consumer spending is slowing and dragging the economy. (iStock)
The second estimate for real gross domestic product (GDP) in the first quarter of 2024 was revised downward, according to the Bureau of Economic Analysis (BEA), driven by a larger decrease in consumer spending than initially estimated.
Real GDP increased at an annual rate of 1.3% for the January-through-March period after rising 3.4% in the fourth quarter of 2023, according to the BEA’s second estimate. This reading is below the BEA’s original GDP estimate for the first quarter, which showed the economy increased at a rate of 1.6%.
Compared to the previous quarter, the decrease primarily reflected a slowdown in consumer spending, exports, and state and local government spending and a downturn in federal government spending. This slowdown was partly offset by an acceleration in residential fixed investment. Thursday’s report confirms that the economy is slowing down, clocking its weakest quarterly pace in nearly two years, according to Jim Baird, Plante Moran Financial Advisors’ chief investment officer.
“Not surprisingly, the loss of momentum in Q1 started with a more constrained spending appetite on the part of consumers,” Baird said in a statement. “Spending on goods turned fractionally negative, with particular weakness in durable goods. Higher interest rates continue to play a role as the cost of borrowing creates an additional hurdle for consumers to consider before pulling the trigger on financing big-ticket purchases. That’s most apparent in vehicle sales, which were negative for the fourth consecutive quarter.”
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Consumer confidence rebounds
Consumer confidence bounced back in May after declining for the last three months, bolstered by a strong labor market. The Conference Board’s Consumer Confidence Index rose to 102 in May from 97.5 in April. The gauge outperformed the University of Michigan’s consumer sentiment index, which dropped to 69.1 in the latest reading from 77.2 in April.
“Confidence improved in May after three consecutive months of decline,” Conference Board Chief Economist Dana Peterson said in a statement. However, the overall confidence gauge continued to hover within the relatively narrow range it has lingered in over the past two years.
The report said that consumers anticipate inflation will tick up over the next 12 months. As a result, the share of consumers who said they expected higher interest rates over the year rose to 56.2% from 55.2%. The survey also revealed a possible resurgence in recession concerns, with more consumers believing a recession is ‘somewhat likely’ or ‘very likely.’
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Shelter costs drive inflation
Shelter inflation – rent and homeownership costs – continued to be a driver of overall inflation in April. They rose by 0.4% in April and 5.5% over the past year. More than half of the overall inflation in the economy has been due to rising housing costs.
The National Association of Home Builders (NAHB) said in a statement that the only way to tame runaway shelter prices is to build more attainable, affordable housing. The lack of housing supply is the biggest reason why homeownership affordability is out of reach for many Americans and why shelter inflation remains high.
“The lack of homes is the primary cause of growing housing affordability challenges,” NAHB Chairman Carl Harris said. “Any policy that seeks to improve affordability without addressing the need to increase the supply of single-family and multifamily for-sale and for-rent housing is doomed to fail.”
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