The US economy’s first-quarter report card and separate assessments of labour costs, spending and inflation in coming days are projected to keep the Federal Reserve tilted toward another interest-rate hike next week.
The data are likely to present a picture of an economy that started the year strong — driven largely by a January surge in consumer spending — before losing momentum. Inflation, however, will still be roughly double the Fed’s target, underpinned by resilient demand for services and strong wage growth.
The reports surface less than a week before Fed policymakers meet on May 2-3 to consider another quarter percentage-point increase in their benchmark interest rate.
Here’s what to watch for in the key reports released Thursday and Friday:
First-quarter GDP
Gross domestic product is expected to have risen at a 2% annualized rate, primarily driven by what will likely be the strongest quarter for personal spending in nearly two years. That said, Thursday’s report will obscure the evolution of activity in the first quarter.
While the year started with a bang, partly reflecting unseasonably warm weather, household spending lost steam as the quarter progressed.
“Some of the growth in Q1 is going to be a bit misleading in our view just because it’s really due to January strength,” said Wells Fargo & Co. economist Shannon Seery. “The slowdown in momentum is really setting us up for a weaker Q2.”
Inventories are expected to be a notable drag on GDP, reflecting a slower build compared to the prior period. Residential investment will likely also weigh on the figure, given the battered housing market. Business investment is seen as tepid, according to the Atlanta Fed’s GDPNow estimate.
The GDP report is significant in that it will also offer data-watchers a sneak peak into Friday’s key monthly inflation and spending figures for March.
PCE deflators
Similar to the consumer price index, the Fed’s preferred inflation metrics on Friday will likely show some signs of moderation last month but also areas of underlying strength, notably on the services side.
Fed Chair Jerome Powell and his colleagues have emphasized the importance of looking at services inflation, excluding energy and housing, to assess price pressures. Bloomberg Economics anticipates this “supercore” measure accelerated in March, increasing pressure on the Fed to hike rates another quarter point next week.
Excluding food and energy, the so-called core personal consumption expenditures price index is expected to increase another 0.3%. Meantime, headline inflation will likely be flattered by lower energy prices and is expected to increase just 0.1% — the smallest advance since July.
The expected advance in the PCE price index on a year-over-year basis should slow markedly since the gauge in March 2022 reflected a spike in energy prices immediately after Russia’s invasion of Ukraine.
The report also provides data on inflation-adjusted consumer spending, which probably fell 0.1% in March on softer demand for merchandise. Should that stagnation in spending continue — like the Fed’s Beige Book survey of regional business contacts recently pointed out — economic growth will be in a precarious position.
Employment costs
Also on Friday, and arguably the most important release of the week, is the employment cost index — a favored measure of compensation among economists, especially those at the Fed. It’s anticipated to have increased 1.1% in the first three months of the year, a slight acceleration from the prior period.
“The ECI release is really key for the Fed in terms of understanding how the feedback loop is from employment back to inflation more generally,” Seery said.
The metric takes into account benefits as well wages and salaries, and — unlike the earnings figures in the monthly jobs report — is not distorted by employment shifts among occupations or industries. By that monthly measure, wage growth has moderated recently. Yet, another metric calculated by the Atlanta Fed points to a re-acceleration in pay gains.
In that way, the ECI report will offer Fed officials a more decisive indication of wage growth and its trajectory. Should there be any surprises on the ECI or on the core PCE price index, Deutsche Bank AG economists said that is “sure to be reflected” in the central bank’s messaging next week.
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