- First-quarter economic growth fell more than expected on fewer exports and low inventory.
- Consumer spending and employment remained robust.
- Inflation decelerated; consumer sentiment declined.
Real GDP declined in the first quarter slightly worse than originally estimated, but mainly because of net exports and declining inventories. Consumer spending remained robust and improved in the latest estimate.
Consumer spending slowed in April but remains strong. Income growth slowed, and the savings rate declined. The housing market saw further declining momentum in April as higher mortgage rates limit demand for new and used homes.
Jobless claims remain low. Sentiment metrics were down in May as consumers contend with higher COVID cases, higher gas prices, and declining stocks.
GDP declined: The decline in first quarter real GDP was revised to an annualized decline of 1.5% in the second estimate from the originally estimated 1.4% decline. Personal consumption was revised up to an increase of 3.1% from the original estimate of 2.7%. Spending on goods was revised to an unchanged performance with the fourth quarter compared to the 0.1% decline first estimated. Spending on services was revised up to a gain of 4.8% from the originally estimated gain of 4.3%.
Gross private investment was revised down to a gain of 0.5% from an original estimate of 2.3%. The government spending decline was increased slightly to a revised decline of 2.7% from the originally estimated 2.6% decline.
The downward revision caused real GDP growth from a year ago to decline to 3.5% from the 3.6% initially estimated. Consumer spending slowed in April from March but came in stronger than expected. Spending grew 0.9% following an upwardly revised increase of 1.4% in March.
Personal income growth also slowed to a monthly increase of 0.4% from a 0.5% gain in March. Wage growth slowed to 0.6% from 0.7% in March. Government transfer payments were unchanged from March, but unemployment benefit payments again declined.
Spending on durable goods increased 2.4% in April, which was an acceleration from a weak 0.5% growth in March. Spending on nondurable goods declined 0.1%, and spending on services increased 0.9%, which was a deceleration from the growth of 1.1% in March. Spending on motor vehicles and parts increased 4.2% in April following a 1.2% increase in March.
The personal savings rate fell to 4.4% with spending growth outpacing income growth. The savings rate averaged 7.5% in the 12 months leading to the pandemic but averaged 13.7% over the 24 months prior to April.
The Personal Consumption Expenditure Index (PCE), the key gauge of inflation that the Fed follows, increased 0.2% in April, which was a big decline from the 0.9% increase in March. Overall price inflation, according to the PCE declined to 6.3% in April from a year ago and from 6.6% in March, which had been the highest year-over-year change since January 1982.
Housing drops: New-home sales, which are based on new contracts signed on newly constructed homes, declined 16.6% in April, which was a much bigger decline than expected, and represented the fourth straight monthly decline. New-home inventory increased 8.3% from March and was up 40.1% from a year ago.
With the increase of inventory and slower pace of sales, new-home supply increased to 9.0 months, which is considered about 50% higher than a normal level of supply. In April, 27% of the new homes sold were on homes not yet started, while 65% were under construction, and 9% were completed units.
With the decline in April, new-home sales were down 26.9% year over year and down 15.8% compared to 2019. As existing home sales also declined in April, total home sales were down 4.0% for the month and down 8.4% year over year. Pending home sales, which are new contracts signed on existing homes, declined 3.9% in April from March, leaving pending sales down 9.1% from a year ago.
Unemployment low: As of May 14, 1.35 million people were on traditional unemployment benefits. Continuing claims increased by 31,000 in the last week but were down 57,000 over the last four weeks. After the weekly increase, claims were 417,000 lower than the claims level before the pandemic began. New initial claims declined in the most recent data. New initial claims for the week ending May 21 declined 8,000 to 210,000. New initial claims are again higher than they were before the pandemic began, now exceed the weekly level in 2020 before the pandemic by 13,000.
Consumer confidence falls: The sentiment index from the University of Michigan declined 10.4% in May as current conditions and expectations both declined. The Michigan reading was down slightly from mid-month and was at the lowest full month reading since August 2011. Buying conditions for vehicles declined and are only slightly better than the all-time low recorded in February.
The Morning Consult index daily index has also declined in May, as it declined 1.9% in the last week and is down 4.8% so far for the month. The daily index from Morning Consult is at its lowest level for the pandemic, as inflation, declining equity markets and increasing cases of COVID driven by omicron variants weigh on consumer attitudes.
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Jonathan Smoke is chief economist at Cox Automotive.