US Demand Is Still Resilient, Even If GDP Doesn’t Show It

Summary:

Bloomberg reports that the U.S. economy experienced a slower growth rate of 1.6% last quarter, falling below all economists’ forecasts. This downturn primarily resulted from decreased inventory accumulation and a wider trade gap. However, this apparent slowdown belies a resilient underlying demand from households and businesses, as evidenced by a robust 3.1% rise in final sales to private domestic purchasers, adjusted for inflation. This metric, which excludes inventories, trade, and government spending, has consistently expanded for three consecutive quarters, indicating continued strength in the domestic economy.

Despite the slower overall economic growth, inflationary pressures have unexpectedly increased, complicating the Federal Reserve’s policy path. A significant gauge of underlying inflation rose by 3.7% last quarter, marking the first acceleration in a year. This rise in inflation, driven notably by a 5.1% increase in service-sector inflation excluding housing and energy, suggests that the Federal Reserve may need to maintain or even raise interest rates to manage price stability. The central bank, facing these new data, is likely to delay any planned rate cuts, which could impact borrowing costs for commercial real estate investors.

For commercial real estate investors, the implications of these economic trends are mixed. While the strong demand in services and the highest increase in residential investment in over three years signal opportunities, the potential for higher borrowing costs due to prolonged high interest rates could challenge profitability. Investors will need to closely monitor Federal Reserve policies and broader economic indicators to navigate this uncertain environment effectively. This economic landscape could influence strategies, particularly in sectors like healthcare and financial services where spending has surged.

Our take (from the Straight to Smart newsletter):

Why Fed Won’t Cut Rates This Year

Article Excerpt:

The surprisingly sharp downshift in US economic growth last quarter masked otherwise resilient household demand and business investment that helped generate faster inflation.

Gross domestic product advanced at a 1.6% annualized rate, below all economists’ projections, with the biggest restraints stemming from less inventory accumulation and a wider trade gap.

Click to read original Bloomberg article (Subscription may be required):
US Demand Is Still Resilient, Even If GDP Doesn’t Show It

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