Gross Domestic Product Declines
Over the past week, the major economic data caused little reaction, and the daily movements in mortgage markets were roughly offsetting. As a result, rates ended the week little changed.
Gross Domestic Product (GDP) is the broadest measure of economic activity. During the first quarter, GDP fell at an annualized rate of 1.4%, well below the consensus forecast for an increase of 1.0%, and down from outsized growth of 6.9% during the fourth quarter. This was the weakest reading since the spring of 2020 when the pandemic caused a partial shutdown of the economy.
While the headline number for GDP was disappointing, it is necessary to look below the surface at the different components to evaluate the underlying strength of the economy. In this case, the shortfall was due to an unexpectedly large decline in inventories, which is viewed as a temporary factor. During the quarter, manufacturers were unable to produce enough cars, for example, to meet demand due to supply chain disruptions. As a result, fewer cars were sold, and inventories at dealers shrank. However, demand remained solid, and investors expect that future sales will ramp up as production capacity increases. In short, economic activity was simply postponed, so the reaction in financial markets was minor.
The PCE price index is the inflation indicator favored by the Fed. In March, core PCE was 5.2% higher than a year ago, down from 5.3% last month, which was the highest annual rate since 1983. For comparison, readings were below 2.0% during the first three months of 2021. One of the big questions for investors is how quickly inflation will moderate as disruptions due to the pandemic and the conflict in Ukraine are resolved.
Looking ahead, the next Fed meeting will take place on Wednesday and a 50-basis point increase in the federal funds rate is widely expected. Investors will look for additional guidance on the pace of future rate hikes and balance sheet reduction. Beyond that, the key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The ISM national manufacturing index will come out on Monday and the ISM national service sector index on Thursday.