Economy slowing, but inflation is persisting
Economic data continues to support the sentiment that the United States economy is slowing down, but rising inflation has yet to truly deter consumers. The latest gross domestic product (GDP) report from the Commerce Department showed just 1.1% growth in Q1 2023. That is down from Q4's 2.6% increase and an overall increase of 2.1% for the full year.
Meanwhile, the personal consumption expenditures index (PCE) came in at 4.2% against estimates of 3.7%. The PCE is a measure of spending that the Federal Reserve uses as a preferred measure of inflation. The core PCE, which excludes the more volatile costs such as food and energy, came in at 4.9% compared to the estimate of 4.4% growth.
These two data points will be key for the Federal Open Market Committee (FOMC) when it meets in the first week of May and debates on raising the federal funds rate once again. The FOMC is walking the fine line of slowing down the economy while also trying to avoid plunging it into a deep recession.
One major indicator of a recession is a yield curve inversion between the 10- and 2-year Treasury note yields. The two yields have been inverted since June 2022. Every recession has been preceded by a yield curve inversion but not every yield curve inversion has resulted in a recession. As of the last trading day of April, the 10- and 2-year notes were separated by roughly 60-basis points. The 10-year yield started trading the day at 3.481% with the 2-year yield sitting at 4.074%.
Despite the economic ups and downs, the housing industry continues to slug through a typically strong spring buying season. The Mortgage Bankers Association shows purchase application volume was up 5% on an unadjusted basis for the week ending April 21. Demand is still strong and is finally being supported by lower home prices. The issue will continue to be lack of inventory, especially at lower price points, as well as stubborn rates.
Joel Kan, the MBA's Vice President and Deputy Chief Economist, said "Although incoming data points to a slowdown in the U.S. economy, markets continue to expect that the Fed will raise short-term rates at its next meeting, which have pushed Treasury yields somewhat higher. As a result of the higher yields, mortgage rates increased for the second straight week to their highest level in over a month, with the 30-year fixed rate now at 6.55 percent."
Freddie Mac's 30-year fixed-rate mortgage average was relatively unchanged and slightly lower than the MBA's estimate, increasing slightly to 6.43%. While that is still high compared to was borrowers saw a year ago at this time, Freddie Mac's analysts are bullish about the coming months for borrowers, saying "The 30-year fixed-rate mortgage increased modestly for the second straight week, but with the rate of inflation decelerating rates should gently decline over the course of 2023. Incoming data suggest the housing market has stabilized from a sales and house price perspective. The prospect of lower mortgage rates for the remainder of the year should be welcome news to borrowers who are looking to purchase a home."
