Despite feeling confident about the economy and financial conditions, consumers did not put their money where their expectations were in the first quarter. Consumer spending hit a roadblock during the first quarter of 2017, bringing economic growth to a sudden halt. GDP rose 0.7 percent, the slowest quarterly growth rate in three years. Spending, which accounts for three-fourths of GDP, increased just 0.3 percent during the first three months of the year. This compares to a gain of 3.5 percent in the fourth quarter. A 0.5 percent decline in auto expenditures accounted for most of the shortfall in consumer spending. On the plus side, business spending on equipment and structures increased 9.4 percent, the strongest growth in 13 quarters. Residential spending was up 13.7 percent, the largest increase since second quarter of 2015. Economists were not expecting growth as strong as in the fourth quarter, but severe weakness in consumer spending is a concern. Optimism around a Trump regime is still to play out.
Other Key Indicators this Week:
Durable Goods – Orders for goods meant to last three years and longer increased 0.7 percent in March after rising 2.7 percent in February. The weakness was due in large part to declines in auto and business equipment orders. Motor vehicles and parts orders fell 0.8 percent. Earlier auto industry reports showed March car sales at the slowest pace since February 2013. The strength in the durable goods reports came from a seven percent increase in civilian aircraft orders and a 12 percent gain in defense capital goods orders.
Housing – The latest housing reports for March reflect a strong start to the spring sales season. New home sales rose 5.8 percent to an eight-month high. However, this follows a downward revision for February to 0.3 percent from 6.1 percent. March sales were strong, despite a 1.2 percent rise in price from a year ago. The supply of homes for sale declined two months to 5.2 months. Pending home sales fell 0.8 percent in March after surging 5.5 percent in February. The warmer February weather and concern about rising mortgage rates likely pushed buyers to sign contracts earlier than normal this year. Approximately 42 percent of the homes sold in March were at or above the listed price.
Consumer Confidence – The latest Conference Board report on consumer confidence showed a slight weakness in the outlook for present and future conditions. The index fell to 120.3 percent from 124.9 percent. Despite the decline, the index remains at the second highest level since December 2000. More consumers expressed plans to buy autos or major appliances than previously reported.
Strategically for Credit Unions:
The weak GDP report is not likely to sway the Federal Reserve from their plans to increase interest rates this year. The quarterly core PCE rate rose to 2.0 percent. One of the Fed’s key inflation gauges, it remains in line with the Fed's targeted inflation goal of 2.0 percent. There is a 70 percent chance for a rate increase at the June FOMC meeting.Sarina Freedland – Senior Investment Officer