According to the BEA's first estimate, the economy grew at a miserable 0.2% annualized rate in the first quarter of this year. The current consensus of opinion holds that this will be revised down to -0.9%. However, we've seen this movie before (e.g., last year's first quarter growth was miserable too), and what happens is that growth bounces back in the second quarter. The GDP numbers are notoriously volatile, much more so than the actual economy, which has considerable "momentum."
Most of the data I've seen over the past few months suggests that the economy continues to grow at a relatively slow pace. Most importantly, there are none of the classical warning signs of deterioration. Swap spreads continue to be very low and relatively stable. Credit spreads are relatively low, and have come down somewhat from their January highs—most of the damage in the credit sector has occurred in the energy and oil-related space, and even there spreads have tightened in recent months. Monetary policy continues to be accommodative, and the nominal and real yield curves are still positively sloped. Real borrowing costs are very low or negative for most borrowers. Commodity prices are down on the margin, but are still much higher (about 40% higher) than they were a decade ago. Fiscal policy could be much more pro-growth, but it's quite unlikely to take a turn for the worst; in fact, it's not unreasonable to think that tax and regulatory burdens are more likely to ease in the future than increase.
One notable exception, however, is the recent trend in cities like Los Angeles and San Francisco to jack up minimum wages. This is like slapping small businesses with a big new tax, as Mark Perry points out, and that is very likely to hurt growth in the affected local economies. The economic ignorance and willingness to pander of politicians apparently knows no bounds. As a reminder, I noted a few months ago that only about 1% of those who work actually earn minimum wage or less. The ones hurt the most from higher minimum wages will be the young and the poor who find that it's much harder to find that first job. The vast majority of workers—and the lion's share of the economy—will not be much affected.
Today's economic releases show that the housing market continues to recover at a fairly impressive pace. According to Case-Shiller, U.S. home prices are up over 30% since early 2012, and are only 13% below their all-time highs of 2005. In real terms, prices are still about 25% below their 2006 highs, so we're likely years away from another housing "bubble." Meanwhile, April New Home Sales were up a very strong 26% from year-ago levels.
Charts and commentary follow:
The two charts above show the nominal and real level of housing prices as measured by Case-Shiller. Both show that prices have been moving steadily higher for more than three years.
As the chart above suggests, the ongoing rise in home prices (which are up 4.7% in the past year), is likely to contribute positively to the CPI over the next year or so. Higher home prices mean higher future rents, and rents make up about 25% of the CPI.
April New Home Sales were stronger than expected (517K vs. 508K), and were 26% above year-ago levels. There is still plenty of upside potential here.
April Capital Goods Orders were also stronger than expected (+1.0% vs. +0.3%), but they remain quite sluggish. I prefer to look at a 3-mo. moving average of capex, and by that measure orders were on the weak side and haven't increased at all since early last year. In real terms, capex hasn't increased at all for the past two decades! This is the least impressive part of the economy, since it reflects a dearth of business investment, and that limits the economy's future potential growth. As a consequence, while it's quite likely that GDP growth will be much stronger in the second quarter than it was in the first, that won't change the underlying fundamentals, which continue to point to growth of roughly 2-3%, with a large (about 10%) and growing "output gap" that I estimate to be about $2 trillion.
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