US Weekly Economic Commentary: Solid growth and elevated inflation still shining through

Last week's data on consumer spending and industrial production for March (and including revisions to prior months) were above our expectations, while data on business inventories through February proved softer than we expected.

In response, we left our estimate of first-quarter growth of real GDP unchanged from one week ago at a trend-like 1.9% (annual rate). Our consensus panel expects slightly slower growth of 1.4%. We raised our estimate of second-quarter growth by 0.2 percentage point, to show a contraction of 0.2%.

Retail and food service sales declined 1.0% in March. However, "core" sales — which exclude sales of vehicles, gasoline, and at home improvement stores, and which inform our estimates of personal consumption expenditures (PCE) — fell a slight 0.2%, less of a decline than we anticipated and from a level in February that was revised up. Furthermore, weekly credit card transactions through early April, reported by the Bureau of Economic Analysis, suggest that spending has rebounded from a low level in March to levels above the first-quarter average.

The new data on sales encouraged us to revise up our estimate of first-quarter real PCE growth to a very robust 4.8% (annualized). To be sure, unseasonably warm weather and other potential issues around seasonal adjustment may mean this figure overstates the underlying strength in consumer spending, but even after accounting for those issues, consumer spending came out of the gates very fast in 2023.

Intolerably high inflation

Industrial production (IP) advanced 0.4% in March, driven by an 8.4% surge in the output of utilities as temperatures, which were unseasonably warm (on a population-weighted basis) early in the year, returned closer to normal as spring approached. Manufacturing production slipped 0.5%, less of a decline than we anticipated and from levels that were revised up from December through February.

Manufacturing IP has unevenly declined 1.1% from the recent peak last September but remains close to the average level since mid-2021. While some of that decline likely is in response to the recent monetary tightening, it may also reflect the continuing post-pandemic rotation of demand from goods back towards services.

While the week's data on inflation showed some encouraging signs, consumer price inflation remains intolerably above the Fed's long-run 2% objective. In an indication that supply constraints are easing, in March producer prices excluding prices of food, energy and trade services advanced just 0.1%, the smallest gain since June of 2020. This reinforces reports from our maritime group that patterns of oceanic shipping have returned close to pre-pandemic norms, and from our Purchasing Managers' Index team that vendor delivery times are improving very rapidly.

Similarly, nonfuel import prices fell 0.5% in March and are down 1.5% over the last year. The Consumer Price Index, restrained by declining energy prices, increased just 0.1% in March and, for the first time since December of 2020, the 12-month change in the headline number (5.0%) fell below the corresponding change in the core index (5.6%). In another welcome development, shelter costs decelerated sharply, although our modeling suggests rent inflation will remain elevated well into next year. More worrisome, the core CPI increased 0.4%, and the 12-month change ticked up to 5.6%, close to the average over the last four months. So, no significant disinflation since December in core CPI prices.

Headwinds and turbulence

Minutes of the March meeting of the Federal Open Market Committee revealed that committee members, while acknowledging the economy will face new headwinds following the demise of Silicon Valley Bank, remained focused primarily on inflation that remains well above the Fed's 2% long-run objective. Expressing confidence that the banking system is fundamentally sound, the Committee voted unanimously to raise the policy rate by 25 basis points.

Meanwhile, indications are that, following initial turmoil after the demise of Silicon Valley Bank, turbulence in the banking sector is subsiding. Combined borrowing at the Fed's discount window and its new short-term lending facility remained high but declined over the week ending April 12, and deposits at small and large banks rose in the week ending April 5.

Still, in the aftermath of the turmoil, and as early as the second quarter, we do expect a general tightening of lending standards to slow economic growth by several tenths of a percentage point over the remainder of this year. In addition, there is concern that rising vacancy rates will undermine the quality of bank loans to the commercial real estate market, especially in the office segment. Such deterioration in loan quality, for any type of loans, would exacerbate the coming tightening of bank credit.

Debt limit dance

To jump start negotiations with the Biden Administration, House Speaker McCarthy is expected to propose suspending the debt limit through May 2024, in exchange for concessions on spending. The Treasury's resort to "extraordinary measures" could then delay the day on which spending would need to be sharply curtailed, so called "X-day," until after the general election. This would allow Republicans to highlight fiscal austerity as an issue in the Presidential campaign.

The House Republican "Main Street Caucus" issued a letter to McCarthy recommending that he propose to cut nondefense discretionary budget authority for fiscal year 2024 back to the level of 2022, and then constrain its growth to no more than 1.5% annually through 2033; rescind $70 billion of unspent COVID relief funds; cancel the President's plan to forgive about one third of student debt; tighten eligibility rules around the food stamp program; and create a commission to explore ways to put Social Security and Medicare on sustainable paths.

For now, the Biden Administration is sticking to its position that Congress should first pass a "clean" bill raising the debt limit — something McCarthy says won't happen — and then propose a budget for fiscal year 2024 to serve as the basis for negotiations. So, despite the week's news, there's little to suggest meaningful progress has been made towards resolving the impasse, and we continue to view the approach to the debt limit as a downside risk to our base forecast.

This week's economic releases:

• New residential construction (April 18): We estimate housing starts declined in March to 1,328 thousand units from 1,450 thousand units in February. This would leave the level of starts depressed relative to levels roughly one year ago.
• Existing home sales (April 20): We estimate existing home sales declined to 4,629 thousand units in March from 4,580 thousand units in February. This would reverse only a small fraction of a 14.5% surge in February, as unseasonably mild temperatures in January and February likely boosted housing sales.
• Conference Board's Leading Economic Index (April 20): A decline in March would continue a string of monthly drops that began last April, suggesting a heightened risk of recession in the near term.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.