When the first quarter Gross Domestic Product (GDP) numbers came out a few weeks ago, we were among the many observers who noted that the lower-than-expected growth rate (1.6 percent real quarter-on-quarter growth, annualized) was actually not all that bad, with both consumer spending and private business investment – arguably the economy’s two most important growth drivers – sustaining their recent healthy trends.
Well, that view (which among others was offered by Fed chair Jay Powell at the most recent Federal Open Market Committee meeting) may have been correct, but in hindsight it also seems like it was the opening act for what has since been a stream of underwhelming macro performance numbers. Consumer confidence for April came in well below economists’ expectations (both the Conference Board and the Michigan sentiment indexes). Regional and national metrics from the Purchasing Managers Index (PMI) and Institute for Supply Management (ISM) showed manufacturing activity moving into contraction territory. First quarter productivity (the most important measure of the economy’s long-term growth potential) came in lighter than expected. The monthly jobs report published by the Bureau of Labor Statistics showed a slowdown in new hiring and a small uptick in the unemployment rate. April retail sales slowed considerably, and the measure that feeds directly into GDP was negative.
Goldilocks Ascendant
One data point does not a trend make, but that’s a whole lot more than one data point. Now, it should not have escaped your attention that while all this soft economic data has been trickling in, the stock market has been quietly climbing back from its April pullback. The S&P 500, Nasdaq Composite and Dow Jones Industrial Average are all right around their record highs, while bond yields have settled into a fairly tight range with the 10-year Treasury hovering somewhere a bit north or south of 4.4 percent on any given day.
This is – or at least this seems to be by just about every measure we see – what an actual “soft landing” looks like. Not too hot, not too cold, but just right, like the Three Bears in the story. The market loves itself a Goldilocks economy, where modest growth is paired with declining inflation and, of course, a better likelihood of interest rate cuts. The other big economic news this week was, of course, the April Consumer Price Index, which arrived almost exactly in line with economists’ expectations. The core CPI rate of 3.6 percent year-on-year is the lowest in three years, with the current forecast for May core CPI coming down to 3.5 percent. With the chance of a Fed funds rate cut in June now all but off the table, investors are looking ahead to September as a more likely occurrence than the prevailing wisdom had it just a couple weeks ago.
We’ll see if this trend continues – there is another batch of PMI reports due to come out next week, followed by another consumer confidence reading and then the Personal Consumption Expenditures (PCE) inflation report before the end of the month. The next BLS jobs report will come out on June 7, and that will tee up the next FOMC meeting (which happens on the same day as the May CPI report gets published). Conditions could change. For now, though, Goldilocks rules and markets are fine with that.