The U.S. economy grew 1.6% in the first quarter, a significant drop from the last two quarters of 2023. Economists in general were not concerned as the elevated levels of growth in 2023 were considered temporary and attributed to businesses finally able to restock shelves. There is also hope that a slower rate of economic growth would help bring down inflation.
As little bit of help would be good as the decline in inflation has stalled out with the consumer price index oscillating between 3.1% and 3.5% since October of 2023. The March CPI reading was 3.5% up 3 tenths of a percent from February.
While a rise in the cost of energy was cited as one of the factors for the March increase, the growth of energy and food prices has slowed considerably to an annual rate of just over 2%. The big sticking point to lower inflation is the cost of housing which was still rising at a 5.7% annual rate in March.
That is significant because housing costs are the biggest component of the Consumer Price index, contributing 43% to the indexes’ calculation.
Another factor influencing the rate of inflation is the cost of labor that goes into making goods and providing services in the US. After years of low wage growth, wages started going up in 2021 and like inflation, peaked in mid-2022. But wage growth has fallen more slowly and was still growing at an annual rate of 4.3% in March.
A big factor for strong wage growth is the shortage of job seekers compared to job openings. While the gap between the two has been narrowing over time, as of March there were still approximately 1.9 million more job openings than job seekers.
And that is keeping the unemployment low with April’s unemployment rate coming in at 3.9% up a tenth of percent from March. The unemployment rate has now stayed below 4% since February of 2022.
Good news on the job front is one reason that consumer spending continues to be strong. Spending was up 8 tenths of a percent in both February and March and there has not a been a monthly decline in spending in over a year.
With inflation remaining elevated, hopes for lower interest rates in 2024 have diminished causing bond markets to pull back. Overall, the U.S. bond market is down 1.48% for the year per the Morningstar Core bond index. Short-term bonds have fared better and are up about a quarter of a percent for the year while longer-term bonds are down approximately 4.9% for the year. Overall government bonds are down about 1.6% for the year while corporate bonds are down about 1.2% per their corresponding Morningstar indices.
The stock market started the year strong on expectations of impending interest rate cuts but has managed to hold up now that those cuts have been pushed off. Overall, the US stock market is up just over 10% for the year but is essentially flat for the second quarter as measured by the Morningstar US Market Index. Looking overseas we are seeing improved growth in some of the biggest international economies in 2024 has the international markets outpacing the US in the second quarter. The Morningstar Global index that excludes the US, is up 1.65% for the quarter but is still trailing the US for the year by about 4%. Emerging markets have surged in recent weeks up nearly 3.5% in the second quarter. But overall, developed markets are still leading up 6.32% for the year to 5.85% for emerging markets per their respective Morningstar indices.
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