If this morning was expected to deliver a one-two punch of data on the economy, neither really landed; in this environment, that’s not a bad thing.
Updated data on Q1 GDP and a fresh batch of jobless claims data did nothing to change the prevailing narrative around the economy and labor market: growth is slowing, but the labor market remains on relatively solid ground.
The second look at Q1 GDP nudged top-line growth down to just 1.3% to open the year — the weakest quarterly advance since Q2 2022. That print was lower than the preliminary estimate of a 1.6% increase but was in line with forecasts, rendering it a virtual nonevent for the markets.
Weaker personal consumption was a key catalyst for the softer result, having been trimmed to just 2.0% in Q1. The underlying nature of consumption continues to illustrate the sharp directional bifurcation in how consumers are spending: less on goods but more on services.
That trend is an extension of the unusual boom/bust cycle in goods consumption since 2020 and the delayed recovery in the service sector as Americans were slow to return to travel and social activities in the early stages of the recovery.
Adjustments related to trade and inventories also weighed on top-line growth. The silver lining is that underlying growth doesn’t appear to be weakening as much as the top-line GDP advance would suggest. Often viewed as a better gauge of the underlying strength of spending, final sales to private domestic purchasers advanced by 2.8%.
The revised GDP report also reaffirmed the stickiness of inflation even as growth slows. Core PCE was revised fractionally lower to 3.6% — still well above the Fed’s target. With most inflation gauges still elevated and rangebound in recent quarters, expectations for rate cuts continue to be pushed back.
Weekly jobless claims edged modestly higher to 219,000 for the week ended May 25, while continuing claims also rose slightly. Neither represented a significant change in the direction of labor market data, which continues to suggest a slow erosion in the underlying strength of labor demand.
Job openings, hiring, and the unemployment rate have all softened over the past year, but labor conditions are still constructive — cooler but far from cold.
Sum it all up and you have an economy that has come off the boil, which needed to, but remains on track for continued growth. Inflation remains a primary challenge to consumers and policymakers — one that’s seemingly poised to be resolved, particularly as wage growth and housing inflation normalize. The question is one of timing for policymakers who need to see evidence that inflation gauges have resumed their descent toward 2% and the risk of a second wind catching the inflation sail has dissipated.
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