This update presents charts and data from key areas of the US economy: the Consumer, the Employment Situation, the Housing Market, and Consumer Sentiment.
Summary:
- First quarter US Real GDP figures (released this quarter) came in at a -0.5% annual growth rate, down from 2.4% in the fourth quarter. However, the numbers are skewed by a dramatic increase in imports ahead of tariffs which is expected to reverse in the second quarter. The underlying GDP print was very solid as it showed an increase in consumer spending, investment, and exports with a reduction in Government spending.
- The year-over-year inflation rate has continued on its lower trajectory.
- The US Consumer has slowed spending modestly but remains resilient. Savings rates have improved modestly but remain below longer term averages. Rising credit card delinquencies and changes in consumer spending due to cumulative inflation sentiment bear watching.
- The employment situation had been strong coming out of the Pandemic but has cooled considerably. Unemployment is low but the labor market is stagnant overall – businesses are not laying off workers and workers aren’t quitting.
- The housing market has felt the effects of higher interest rates most acutely with existing home sales plummeting, pending home sales near record lows, and mortgage rates elevated. Despite 1% interest rate cuts by the Federal Reserve between September and December of 2024, mortgage rates remain above 6% because they are influenced by longer term interest rates which remain elevated.
- Subjective measures of Consumer Sentiment have been low for the last 3 years and are well below average. Sentiment is particularly poor in the housing market with a record low number of people feeling that this is a good time to buy a house. However, the NFIB reports that small business optimism has risen considerably. These measures of “soft” data do not always translate well to actual “hard” data but is worth noting.
Consumer:
Inflation continues to move lower toward the Fed’s 2% inflation target. Inflation readings may remain bumpy but the trend has been lower.
Inflation-adjusted weekly earnings have improved. Year-over-Year real earnings were negative throughout 2021 and 2022 levels but have improved with falling inflation.
Consumer spending remains positive but has slowed modestly as consumers deal with the cumulative inflation of the last four years. It will be important to watch for signs of decelerating consumer spending for its impact on US growth but, for now, Americans are spending (see our blog for why consumer spending matters so much).
Personal Savings have improved from very low levels, but remain well below the 10-year average and the pre-pandemic level. This has led more consumers to buy on credit. About 1 in 8 credit card holders face delinquency, which is significantly above the pre-pandemic average.
Employment:
The employment situation had been strong coming out of the pandemic but now the labor market can be described as stagnant. People aren’t getting laid off and aren’t quitting, but hiring remains very low. Please read our blog for a detailed look at the US Labor Market.
1. The traditional unemployment rate (U3 unemployment) remains low at 4.1%. The underemployment rate (U6 unemployment) has increased modestly but has leveled off in the recent months and remains below the long-term average.
2. Continuing claims for unemployment insurance remain elevated but have not been increasing. A high or increasing number of continuing claims indicates it is difficult for unemployed people to find work.
3. Finally, the number of unemployed people has risen fairly dramatically with about 1.2 million more people unemployed since the beginning of 2023. However, that figure has declined slightly so far this year. At the same time, the number of job openings in the US has increased recently but is still in a longer term downtrend.
Housing
The housing market remains beleaguered, mostly due to interest rate and supply dynamics.
Existing home sales are well below the pre-pandemic level. Meanwhile, new home sales have fared relatively better as more supply has come online. Overall, the housing market is nearly frozen as the index of pending home sales in the US is near the lowest level in the index’s history.
Home prices are still rising but at a much slower rate than the Covid-era (blue line). This is partially due to elevated mortgage rates (orange line) although those have come down from their 2023 highs. The mortgage rate has been above 6% for almost three years. It is very difficult for many people to buy a home given high interest rates and limited supply.
Sentiment:
Finally, Consumer Sentiment - as measured by the University of Michigan – is still well below its long term average (although above the 2022 lows when inflation peaked).
Perhaps the area where Americans feel least optimistic is in their ability to buy a house. According to the same University of Michigan survey, the number of respondents who believe this is a good time to buy a house is hovering near a record low while the share of first-time home buyers has also fallen dramatically.
On a positive note, Small Business Optimism has risen well off the lows of 2022 – 2024 according to the National Federation of Independent Business.
