Yahoo Finance From US Stores to Factory Floors, Second Quarter Starts Out Slow
(Bloomberg) -- A string of reports this week illustrated a slow start for the US economy in the second quarter, adding to evidence that demand is cooling which will help set the stage for the Federal Reserve to cut interest rates.
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New US home construction and manufacturing both came in softer than expected, according to data released Thursday. That followed reports that showed a steep dropoff in retail sales and the first step down in underlying inflation in six months, sending stocks soaring.
Fed officials speaking in separate events Thursday still said that rates should stay high for longer. But investors are betting that the data this week signal the economy is shifting into a lower gear, which could give policymakers the confidence they need to lower borrowing costs.
“The US economic data have consistently landed on the low side of expectations of late, suggesting the economy is losing momentum in the face of restrictive monetary policy,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note. “But the jury remains out on how quickly inflation will subside to provide some rate relief.”
Recent momentum in the housing market showed signs of softening, as builders broke ground on fewer homes than forecast and permit authorizations for construction dropped. Activity on America’s factory floors remained sluggish as the Fed’s industrial production report showed a decline factory output.
A report Wednesday showed stagnant retail sales after healthy advances in the prior two months, indicating high borrowing costs and stretched budgets may be encouraging consumers to temper their discretionary spending.
Americans may also be pulling back as the job market showed signs of softening in April after a strong start to 2024. Employers added 175,000 jobs, the fewest in six months, while the jobless rate edged up to 3.9%, according to figures out earlier this month. Hourly earnings growth also slowed.
Following Thursday’s releases on housing starts and industrial production, the Atlanta Fed’s GDPNow model lowered its estimate for second-quarter growth. The Dow Jones Industrial Average eclipsed 40,000 for the first time, a day after the S&P 500 notched its 23rd record in 2024.
Housing Market
The slower-than-expected pace of housing starts and decline in construction permits suggest the recent rise in mortgage rates is giving builders pause as they assess the demand outlook. Industry sentiment also took a step back as mortgage rates have stayed above 7%, separate data this week showed.
Permits for single-family home construction have now dropped for three straight months to the lowest level since August after trending higher toward the end of last year. That may constrain home construction going forward.
“It may be that builders are a bit concerned about whether demand will take them out of their inventories and, as a result, are scaling back the pace of new production modestly,” Stephen Stanley, chief US economist at Santander US Capital Markets LLC, said in a note.
Manufacturing Malaise
Industrial production stagnated in April, restrained by a drop in factory output as optimism at the start of the year for growth in the manufacturing sector has been tempered.
Manufacturing, which accounts for three-fourths of total industrial production, has had difficulty building momentum amid rising input prices and inconsistent demand. The Institute for Supply Management’s latest measure of factory activity moved back into contraction territory in April after expanding a month earlier for the first time since 2022.
Consumer Caution
Wednesday’s retail sales report showed declines in seven out of 13 categories. Much of the spending was on necessities like food and gasoline, rather than on discretionary goods.
The sales figures indicate a softening in otherwise resilient consumer demand that’s been bolstering the economy. While the labor market is providing the wherewithal to spend, elevated prices and interest rates risk further squeezing household finances.
Household debt reached a record high in the first quarter and the proportion of consumers struggling to repay debts rose, data from the New York Fed showed Tuesday. With budgets becoming tighter, Americans are growing less upbeat.
Consumer sentiment, as measured by the University of Michigan, stands at a six-month low on concerns about jobs and borrowing costs. The report out last week also showed buying conditions for big-ticket items slid to a one-year low.
Cooler Inflation
Wednesday’s marquee report on consumer prices showed a measure of core inflation cooling for the first time in six months. The consumer price index excluding food and energy rose 0.3% to snap a streak of three above-forecast readings.
Fed officials will want to see additional readings to gain the confidence they need to start thinking about cutting interest rates. Chair Jerome Powell said Tuesday the central bank will “need to be patient and let restrictive policy do its work.”
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