Daily Digest

Debt & Equity Finance

6 Economic Drivers to Watch in May

May 3, 2023

Economic Market Pulse – May 3rd 2023 – Steig Seaward

GDP Climbs at Lackluster 1.1% Pace as U.S. Businesses Retrench

The U.S. economy grew at a soft 1.1% annual pace in the first three months of this year, as declining business investment offset strong consumer spending and pointed to slowing growth.

Wall Street analysts had forecast a 2% increase in gross domestic product, the official scorecard for the economy. GDP had expanded by 2.6% in the fourth quarter.

Consumer spending, the main engine of U.S. growth, drove the economy forward in the first quarter. Outlays jumped at a 3.7% clip, the biggest increase in almost two years.

Households got little help from businesses, however, and probably can’t expect much in the near future. Companies cut investment and reduced production, shaving 2.3 percentage points off headline GDP.

June is Off the Table for a Debt Limit Crisis, but July is Not

Now that the majority of the tax season has passed, it’s expected that the Treasury can fulfill its obligations without requiring an increase or suspension of the debt limit until mid-June. Nevertheless, there remains a high likelihood of reaching the drop-dead date in the latter half of July, and there isn’t a feasible way for the Treasury to meet all its obligations in early August without action on the debt ceiling. 

House Republicans just passed a bill that would raise the debt limit, reduce significant spending, and reverse numerous legislative achievements of President Biden. However, the legislation is a non-starter for Democrats, and currently, there appears to be no apparent off-ramp to avoid a nasty debt ceiling fight. 

U.S. Consumer Confidence Falls to 9-Month Low

According to the Conference Board’s latest report, consumer confidence plummeted to a nine-month low of 101.3 in April due to persistent concerns about a potential U.S. recession and a softening labor market. 

The widely tracked index declined 2.7 points from a revised 104 the previous month, marking the lowest confidence level since July 2022. 

The Wall Street Journal survey of economists had predicted the index to reach 104.

Inflation Barely Rises, PCE Shows

The rise in the Personal Consumption Expenditures (PCE) index of 0.1% and was in line with Wall Street’s expectations. The yearly price increase declined to 4.2% from 5.1% in the prior month and now stands at the lowest level since May 2021, but still double the Fed’s 2% inflation target.

Despite this positive news, the closely watched core PCE inflation index increased by 0.3% last month. The core inflation rate has declined slightly from 4.7% to 4.6% over the last 12 months but has remained within a narrow range for the previous five months. 

Durable Goods Orders Get Boeing Boost, but Businesses Retrench as Economy Slows

Orders for manufactured goods got a boost in March from new contracts for passenger planes, but more broadly, business investment fell again in another sign the U.S. economy is slowing.

Durable goods orders jumped 3.2% last month.  Economists polled by the Wall Street Journal had forecast a 0.5% increase.

However, orders rose a scant 0.3% if cars and planes are excluded.  The transportation segment is a large and volatile category that often exaggerates the ups and downs in industrial production.

U.S. Employment Costs Remain Sticky, Boosting Expectations of Fed Hike

The U.S. employment cost index, the broadest measure of U.S. labor costs, rose 1.2% in the first quarter after gaining 1.1% in the last three months of 2022.

Compensation climbed at a 4.8% clip in the 12 months ended in March, down from 5.1% in the prior quarter. That was the highest rate since 1990.

Economists say compensation in the 3% range is consistent with the Federal Reserve’s 2% inflation target.

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