US Weekly Economic Commentary: Soft data paint mixed picture amid slowing economy

In a week light on "hard" data, we left our estimate of first-quarter real GDP growth unrevised at 1.9%.

Housing starts in March were somewhat above our expectations. Given the lag between starts and construction put-in-place, we raised our estimate of second-quarter growth, by 0.2 percentage point, from a contraction of 0.2% to no change (0.0%).

Our consensus panel expects slightly slower growth than we do over the first half of this year: 1.6% in the first quarter, and a contraction of 0.2% in the second quarter. Supporting our expectation that slowing growth eventually will lead to further disinflation, initial claims for unemployment insurance rose 5,000, to 245,000 in the week ended April 15. Claims have been climbing unevenly since early January, a possible early indication that tightness in labor markets is easing.

Last week was a busy one for "soft" data and, as is often the case when the economy is decelerating, results from several surveys painted a mixed picture of economic conditions. The Empire State manufacturing survey reported a surge in April that left the index for general business conditions in New York above 50 for the first time in five months. In contrast, the Philadelphia Fed's survey of business conditions, which has been falling unevenly since mid-2021, plunged in April to the lowest reading since the depths of the pandemic.

In the Federal Reserve's "Beige Book," nine Districts reported little or no change in economic activity since the last survey, while three reported modest improvement. Eleven Districts reported little or no change in expected future activity, while in two Districts activity was expected to weaken.

The "flash" estimate of our own S&P Global PMI for April suggested a revival of economic momentum. The composite index for output rose from 52.3 in March to 53.5 in April, an 11-month high. The improvement was broad-based. Sub-indices for service activity and manufacturing output suggested both sectors expanded.

Finally, the National Association of Homebuilders composite Housing Market Index recorded its fourth straight monthly increase in April that, along with other data on building permits, home sales, and house prices, suggests housing activity, especially the single-family portion, is forming a bottom. We have concerns down the road a bit for multi-family construction given signs of over-building and softening rents.

Third-quarter outlook

We expect that, following a second-quarter pause, GDP will resume growing in the third quarter. However, against a backdrop of tightening monetary policy, the economy faces two mid-year downside risks not fully reflected in our base forecast: a potentially severe tightening of credit in the aftermath of recent turmoil in the banking sector and the possibility that the debt limit will not be raised in time to avoid a financial convulsion, or even a sharp fiscal contraction.

On the banking front, there's been little change over the last week. Initial financial turbulence following the collapse of Silicon Valley Bank (SVB) has subsided. Deposit outflows appear to have stabilized. Banks' borrowing from the Fed, while still elevated, is below levels recorded immediately following the demise of SVB. Loan growth is slowing, and there is concern over the quality of commercial real estate loans held by regional banks. Bank regulators continue conducting postmortems on their failed oversight. There is not yet enough evidence to assess fully the potential severity of the general tightening of the terms of credit that is now widely expected to develop in the coming months. Our base forecast does show some further tightening of lending standards that pares about 0.2 percentage point from GDP growth (at an annual rate) over the last three quarters this year, but it could be worse.

To leverage the debt limit and force the White House to negotiate spending cuts, Speaker McCarthy is preparing to introduce the Limit, Save, Grow Act directly to the House floor. Sponsors estimate that if implemented the bill would reduce deficits by $4.5 trillion through 2033, although the Congressional Budget Office has yet to release an official score. The bill, which is a symbolic statement of Republican priorities, will not pass in the Senate, and may not even survive what will be a close vote in the House. It's unclear if, or when, the Republican strategy will bring the Biden Administration to the negotiating table.

New estimates suggest the US may become unable to meet its financial obligations by early June — only six weeks away — as reports suggest capital gains tax receipts have fallen significantly this year relative to 2022. Our base forecast presumes the debt limit is raised without major incident. We've estimated that a 2011-style brush with the debt limit would slow GDP growth over the second half of this year by about 0.5 percentage point. The political circumstances are more unpredictable today than in 2011, raising the odds that a resolution will not be reached in time to prevent a technical, if not full, sovereign default.

In recent speeches, several Federal Reserve officials have indicated they could support further increases in interest rates to address inflation that remains persistently and intolerably above the Fed's long-term 2% objective. We anticipate that in May the Federal Open Market Committee will hike the Fed's policy rate by 25 basis points, to a peak range of 5% to 5¼%, with a reversal in policy not coming until next year.

This week's economic releases:

• Durable goods orders (April 26): After adjusting for inflation in the durable-goods manufacturing sector, we estimate that real orders for durable goods are down somewhat from last fall. We estimate orders for nondefense capital goods excluding aircraft fell 1.0% in March.
• Nominal goods deficit (April 26): We estimate the nominal goods deficit narrowed in March by $0.2 billion to $91.8 billion from $92.0 billion in February.
• Personal income and outlays (April 28): We estimate nominal personal income rose 0.2% in March, and that nominal personal consumption expenditures (PCE) declined 0.2%, real PCE unchanged from February. We look for a 0.4% increase in the PCE Core Price Index.
• First-quarter GDP advance estimate (April 27): We estimate real GDP advanced at a 1.9% annual rate in the first quarter. This would be down somewhat from 2.6% growth in the prior quarter.
• Employment cost index (April 28): A 1.1% increase in the employment cost index (ECI) for the total compensation of civilian workers over the three months ending in March would imply a twelve-month increase of 4.7%. The consumer price index (CPI) for all urban consumers rose 5.0% over this period, so wages, by this measure, are not keeping pace with inflation. A 4.7% increase in the ECI would be down from higher readings (about 5.0%) during much of last year and could signal the early stages of an easing in wage pressures.

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.