Though this is only an “advance estimate” from the Bureau based on only partial data, and it will be revised at the end of May when final figures arrive, this news came as a worrisome dark cloud for American business.
After overall GDP growth for all of 2023 closed the year at a net 2.5%, and the fourth quarter showed real GDP rose by 3.4%, the latest report that real GDP growth from January-March was only 1.6% set off shock waves through financial planning organizations and major economic forecasting agencies across the country.
It also pushed down both the Dow Jones Industrial Average and NASDAQ stock indices by about 1.6%.
This happened despite employers bringing on board 303,000 new hires in March, a rate some 31% higher than the average growth rates over the last twelve months. It is considered a slow but steady growth rate for an economy which many pundits felt might not continue to create new jobs for so long.
Unemployment was also low and stable at 3.8%. It also marked a milestone of unemployment remaining below 4% for the longest continuous period in five decades.
But coming with that news were several warning signs for the economy, signs that now appear to be undermining its long-term trajectory.
One factor is inflation rates, which while nowhere near the 9.1% value in June 2022, have remained stubbornly high at 3.5%. That is well above the nation’s 2% inflation target and continues to hover at that point without any sign that it will come down. This is despite everything Federal Reserve Board Chair Jerome Powell has attempted in terms of ratcheting up the Fed’s prime lending rate to near-record levels now holding steady at 5.25% to 5.50%.
And of course the high interest rates is one of the things that is driving inflation. The Fed lending rate remaining high for so long continues to make credit of all kinds, including for purchasing homes or buying on credit cards for consumers, plus new capital investments and construction investments for corporations, far more expensive than some years ago.
Intertwined with all of this is that hourly pay rates for all employees continue to go up at a rate just slightly higher than the inflation rate. As of March, the annualized pay rate increase for nonfarm jobs in the country was up 4.1%.
The pay increases are there in part because of the highly competitive nature of the job market right now. And those pay increases themselves fuel inflation further by making anything that requires labor to be more expensive. But with credit costs substantially up and the American economy so heavily dependent on consumer spending, with roughly 70% of the nation’s GDP growth tied to that factor, it means individuals are quickly increasing their debt load to the point that they are having to cut back on some of their spending just to make ends meet.
Another warning for the long-term health of the economy involved where the new job growth was coming from. Rather than being part of a genuine across-the-board hiring trend, over the six months the trends showed health care, leisure and hospitality, and government as the new pillars supporting the economy. While those are helpful to keeping money flowing in the consumer side of the economy, all three of those are at risk of slowing down though for different reasons. The health care industry, with its own costs rising, and leisure and hospitality, which depends on people continuing to have extra cash in their pockets, may be affected more than most when consumers find they have less discretionary income. Government, the third of those industries which continue to hire, may also cut back at least part of its expenditures as the economic cycle tightens.
Construction, the fourth highest hiring growth area for the economy last month with 39,000 new jobs added, a rate just over double the mean 19,000/month hiring rate from April 2023 through March 2024, might seem a positive indicator of investment growth in the country. But with the main contributor to this sector’s growth being in the nonresidential specialty trade contractor subsegment, rather than mainstream construction, it suggests the construction industry is narrowing its hiring opportunities at this critical time.
Further concerns in the hiring report were the business areas that showed no new job growth. Those included the information services; financial activities; manufacturing; mining, quarrying, and oil and gas extraction; professional and business services; and transportation and warehousing segments of the economy. Of these, the lack of growth in the transportation and warehousing area, along with the manufacturing and professional and business services categories, suggests some of the key drivers of the economy may be sagging more than had been expected at this point.
According to the Bureau of Economic Analysis, critical to the shift in economic growth in Q1 were slowdowns in the rates of consumer spending on domestic purchases; for government at the federal, state, and local levels; and in exports. Residential fixed investments went up slightly.
On the general business front, manufacturing investments were also down last quarter. That has not yet showed up in terms of jobs but that is expected soon
Consumers also shifted a considerable part of their spending to experiential options, manifested in the growth of the leisure and hospitality industry. They have also slowed their purchases of durable goods, showing up in a strong downturn in auto purchases last quarter.
Individuals also began shifting from domestic purchases to imports, which subtracts from the domestic GDP since it sends more money overseas.
Contributing to that purchase shift were that costs of domestic goods and services went up last quarter. The price index for gross domestic purchase went 3.1% for the January-March period, compared to just 1.9% in the fourth quarter. In addition, the import personal consumption expenditures price index jumped to 3.4% in Q1 versus just 1.8% in the October to December quarter. Excluding the highly volatile food and energy price sectors which often distort the price index calculations, the PCE index for Q1 rose by 3.7% compared to Q4 2023’s 2.0% percent.
Such price increases mean that even with salaries rising by a 4.1% annually, they are finding their real rate of income increase dropping. Add to that the increased cost burden of servicing personal credit debt, with total consumer debt up 22% since the pandemic passed. With that heavy ongoing financial burden, even with the 4.1% salary growth many people are finding their real discretionary income is already falling.
The BEA also reported that current-dollar personal income – unadjusted for inflation – did rise by $407.1 billion in the first quarter. That compares to a $230.2 billion increase in the fourth quarter. Total compensation packages going up was the main contributor to that growth.
Disposable personal income was also up last quarter. It went up by 4.5% to $226.2 billion. That compares to Q4’s increase to $190.4 billion in Q4, up by 3.8% from Q3 2023’s value. Adjusted for inflation and accounting for higher tax rates associated with that income, the BEA reports that the real disposable income increase in fact fell to a rate of 1.1% versus Q4’s 2.0%.
Individuals are also saving less even as their spending goes up and real disposable income is dropping. In Q1 net personal savings across the country totaled $755.7 billion. That is a 7.5% drop from Q4’s personal savings total of $815.5 billion. The personal savings rate, an economic data point defined as the ratio of personal savings to disposable personal income, also fell quarter to quarter. That value was just 3.6% in Q1 2024 versus 4.0% in Q4 2023.
Overall, current-dollar GDP increased in Q1 at an annual rate of 4.8%. That is a $327.5 billion increase to a new high of $28.28 trillion. That compares to Q4’s $346.9 billion increase in current-dollar GDP. That was a 5.1% increase compared to Q3 2023.
Underlying this data are two issues which could paralyze the economy sooner rather than later.
Stagflation is one of those. The term is defined as a business cycle where inflation remains high, growth is at least on an upwards trend but sluggish, and unemployment remains high for extending periods of time, weighing down the economy. The current trend is a distorted version of that, with unemployment still low, but even without that the combination of slow growth in which the economy is struggling to keep pace with inflation is still serious.
The problem with stagflation is that it becomes a self-sustaining cycle and an economic trap. With lower rates of consumer spending expected to continue as credit costs go up, the nature of what people are spending on shifting away from goods in general, transfer of money overseas as the percentage of imports increases, and inflation still rising alongside what will likely be a lower rate of wage growth, the economy could sputter further in the coming months.
After these latest figures from the Bureau of Economic Analysis, economists will be monitoring two new government reports coming out on May 3, when the government releases the latest reports on inflation and consumer spending data. Also being watched carefully are quarterly earnings reports from companies most sensitive to a slowdown in consumer purchases, especially in areas where people can easily postpone what they are considering buying.
For those who watch large equipment auctions as an economic indicator, prices on many items at this week's Ritchie Brothers auction in Phoenix should raise some red flags. Many items sold for half of what they did back in February.