The Federal Reserve is looking past the economy’s weak first quarter and has signaled that it will continue raising interest rates as planned.
Its policy statement on Wednesday said the Federal Open Markets Committee “views the slowing in growth during the first quarter as likely to be transitory.”
The advance release of first-quarter gross domestic product showed the economy grew by 0.7%, its slowest pace in three years. The increase in consumer spending, the largest contributor to growth, was at the lowest since 2009, at 0.3%.
“Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid,” the statement added.
According to the Fed, near-term risks to the economy are “roughly balanced,” meaning extended weakness is possible. However, these charts show why the Fed considers the first-quarter slowdown as temporary:
Consumer confidence is still high.
- Deutsche Bank
Consumer confidence and expectations for future economic conditions have recently slipped, but are still well above their pre-election levels. This is part of what made the drop in spending last quarter puzzling.
Wages are rising slowly. But they’re rising.
- Deutsche Bank
The Employment Cost Index, a measure of how expensive workers are for employers, rose 0.8% in the first quarter, the fastest pace since 2007.
The Fed is happy with the jobs market.
- Wells Fargo
For the most part, at least. The trend of job creation is above the level needed to hold the unemployment rate near its lowest level since the recession.
Home sales remain in an uptrend.
Existing-home sales, where most deals close, are at a 10-year high.
The National Association of Realtors has said sales could be higher if a shortage of affordable houses wasn’t creating so much competition among buyers.
Auto sales – the other big-ticket expense for households – have rolled over in 2017, causing some concern.
The decline comes after an unprecedented seventh-straight record year of sales, and so some softness was expected. Also, the motor vehicle industry is 2.8% of real GDP, giving it an unsubstantial share of the economy, according to Deutsche Bank’s Joseph LaVorgna.
The Fed sees a comeback in the second quarter.
- Atlanta Fed
The Atlanta Fed’s GDPNow model forecasts 4.3% growth. It is super-early, and a lot of data is still incoming, so that estimate will be revised lower as usual.
However, the first quarter has tended to undershoot the growth trend since 2010 because of glitches in how the Commerce Department accounts for seasonality.
- Thomson Reuters