Authors: Zhong Zhengsheng and Fan Chengkai (Zhong Zhengsheng is a director of the China Chief Economist Forum and the chief economist of Ping An Securities)
Key takeaways
1. GDP growth slowed down in the first quarter. Real GDP in the United States in the first quarter of 2024 was 1.6% on an annualized basis, a significant slowdown from 3.4% in the previous quarter and lower than market expectations of about 2.5%. It is mainly attributed to three factors: First, the consumption of goods has shrunk. The annualized rate of goods consumption fell to -0.4% from 3.0% in the previous quarter, contributing 0.8 percentage points to growth. The growth rate of service consumption increased from 3.4% to 4.0%, but the growth rate of overall consumption slowed from 3.3% to 2.5%, and its contribution to GDP growth decreased from 2.2 percentage points to 1.7 percentage points. Second, the net export dragged down greatly. Net exports dragged down GDP growth by 0.9 percentage points in the first quarter, with imports accelerating from 2.2% to 7.2% and exports slowing from 5.1% to 0.9%. Third, government spending has slowed down. The growth rate of government expenditure fell from 4.6% to 1.2%, and its contribution to GDP growth decreased by 0.6 percentage points. The good news is that the growth rate of residential investment has risen sharply, from 2.8% to 13.9%, which has led to an increase in overall investment growth.
2. The inflation indicator is strong. In the first quarter, the PCE price index was 3.4% quarter-on-quarter, significantly higher than the previous value of 1.8%, and the core PCE price index was 3.7% quarter-on-quarter, also significantly higher than the previous value of 2.0%. The U.S. PCE and core PCE are expected to be around 2.9% and 3.0% year-on-year, respectively, in March.
3. What are the clues of residents' income and expenditure? In the first quarter, the growth rate of tax revenue rose sharply from 6% to 28%, coupled with the rebound of inflation, and then the growth rate of residents' (real) disposable income slowed down from 2% to 1.1% month-on-month. However, residents' willingness to spend remained strong, and the savings rate dropped from 4% to 3.6%.
4. The market temporarily trades "stagflation". After the release of the first-quarter GDP data on April 25, the 10-year U.S. Treasury interest rate rose above 3.7%, hitting 3.73% and then retreated; U.S. stocks opened sharply lower, but the decline slowly narrowed; the U.S. dollar index rose first and then fell, turning from rising to falling during the day. CME rate cut expectations have been delayed, the probability of a rate cut in September has dropped from 70% the day before to 60%, and the rate cut for the whole year has been reduced from 41BP to 35BP, and interest rate futures markets have begun to bet on a "rate hike", albeit less than 1%.
5. Outlook for the future: U.S. inflation is stickier, and the "tightening trade" continues in the second quarter. In our view, the risk of "stagnation" in the United States is relatively limited, but the risk of "inflation" is undoubtedly rising. In terms of economic growth, the 1.6% quarter-on-quarter growth rate in the first quarter is not weak, given the base reasons, and our latest forecast is for US real GDP growth of 2.4% for the full year. Looking ahead to inflation, it is expected that the second quarter will remain high, with energy, housing, and non-residential core services prices likely to be high, and in the third quarter, inflation is likely to fall due to base reasons and the lagged response of rents to house prices. On the policy front, we have lowered the number of rate cuts for the year to one, with the first rate cut likely to be in the fourth quarter. On the market front, the "tightening trade" is likely to continue in Q2: the 10-year Treasury rate is expected to fluctuate at a relatively high level of 4.6% in Q2. U.S. equities are expected to remain under some adjustment pressure amid rising valuation pressures (delayed by the Federal Reserve's rate cuts), widening risk premiums (negative S&P 500 risk premiums above 0.5 percentage points), and a more uncertain earnings outlook.
Risk warning: the U.S. economy is downside more than expected, U.S. inflation is falling more than expected, U.S. financial risks are rising more than expected, and non-U.S. economies and policies are changing more than expected.
Real GDP growth in the United States slowed more than expected in the first quarter, while quarterly price growth rebounded faster than expected. In the past two quarters, the annualized rate of nominal GDP in the United States has been around 5%, but the performance of volume and price has been differentiated, and "volume has fallen and price has risen" in the first quarter, causing "stagflation" concerns. In our view, the risk of "stagnation" is relatively limited, but the risk of "inflation" is undoubtedly rising. Our latest forecast is that the real GDP growth of the United States will be 2.4% for the whole year, and the PCE and core PCE will remain around 3% year-on-year in the second quarter, and will only likely fall back in the third quarter. On the market front, the "tightening trade" is likely to continue in the second quarter.
1. GDP growth slowed down in the first quarter
Real GDP in the United States in the first quarter of 2024 was 1.6% on an annualized basis, a significant slowdown from 3.4% in the previous quarter and lower than market expectations of about 2.5%. In terms of sub-items, the year-on-month annualized rate of GDP ("growth rate") slowed down mainly due to three factors:
First, the consumption of goods has shrunk. The annualized rate of goods consumption fell to -0.4% from 3.0% in the fourth quarter of last year, and its contribution to growth decreased by 0.8 percentage points. Although the growth rate of service consumption increased to 4.0% from 3.4% in the fourth quarter of last year, the growth rate of overall consumption slowed from 3.3% to 2.5%, and its contribution to GDP growth fell from 2.2 percentage points to 1.7 percentage points.
Second, the net export dragged down greatly. Net exports dragged down GDP growth by 0.9 percentage points in the first quarter, with import growth accelerating to 7.2% from 2.2% in the fourth quarter of last year, and export growth slowing from 5.1% to 0.9%. The appreciation of the US dollar is an important background, with the US dollar index rebounding from 101 at the beginning of the year to above 104 at the end of March.
Third, government spending has slowed down. The growth rate of government expenditure slowed to 1.2% from 4.6% in the fourth quarter of last year, and its contribution to GDP growth decreased by 0.6 percentage points. The slowdown in government spending is largely in line with our expectations, and after the rapid growth of government spending in 2023, the "normalization" of spending this year is bound to be reflected in the decline in month-on-month growth.
However, the good news is that the growth rate of residential investment rose sharply in the first quarter, from 2.8% in the fourth quarter of last year to 13.9%, which also led to the overall investment growth rate from 0.7% to 3.2%.
2. The inflation indicator is strong
The PCE price index in the first quarter was 3.4% on an annualized basis, significantly higher than the previous quarter's 1.8%. Excluding energy and food, the core PCE price index was 3.7% month-on-month, which was also significantly higher than the previous value of 2.0%. From a year-on-year perspective, PCE in the first quarter increased by 2.6% year-on-year, a slight decrease from the previous value of 2.8%, while core PCE was 2.9% year-on-year, and the stronger previous value of 3.2% also declined. Accordingly, it is expected that the upcoming US PCE and core PCE in March will be around 2.9% and 3.0% year-on-year, respectively. We have revised our 2024Q2 PCE and core PCE year-on-year (quarterly average) forecasts upwards to 2.7% and 2.9%, respectively.
3. What are the clues to residents' income and expenditure?
Tax revenue growth rose sharply from 6% to 28% in the first quarter, coupled with a rebound in inflation, and the growth rate of US residents' (real) disposable income slowed from 2% to 1.1% quarter-on-quarter. However, the willingness of US residents to spend is still strong, and the savings rate has fallen from 4% to 3.6%. The above data reveal two kinds of information: on the one hand, the rebound in inflation has somewhat suppressed the growth of residents' real income, resulting in a cooling of residents' real consumption expenditure; on the other hand, residents' consumer confidence is still strong, and they are willing and able to continue to use savings. We stress that wage growth, a healthy balance sheet and a high propensity to consume are expected to support private consumption throughout the year.
4. Temporary market trading "stagflation"
Immediately after the release of US Q1 GDP data on April 25, the market traded "stagflation", but sentiment has since eased. The 10-year U.S. Treasury interest rate rose above 3.7%, touching 3.73% and then retreating; U.S. stocks opened sharply lower, but the decline slowly narrowed; the U.S. dollar index rose first and then fell, turning from rising to falling during the day. CME rate cut expectations have been delayed, the probability of a rate cut in September has dropped from 70% the day before to 60%, and the rate cut for the whole year has been reduced from 41BP to 35BP, and interest rate futures markets have begun to bet on a "rate hike", albeit less than 1%.
5. Outlook for the future: U.S. inflation is stickier, and the "tightening trade" continues in the second quarter
In the past two quarters, the annualized rate of nominal GDP in the United States has been around 5%, but the performance of volume and price is different. In our view, the risk of "stagnation" is relatively limited, but the risk of "inflation" is undoubtedly rising.
In terms of growth, the 1.6% QoQ annualized rate is not weak due to the base factor, and for the full year, we forecast Q2-Q4 2024 to be 1.6%, 1.8% and 1.8% QoQ annualized rates, respectively, and 2.4% for the full year.
On the inflation front, U.S. inflation rose again in Q1 from the previous quarter, driven by energy, housing rents, and transportation services (a significant contribution to the "super-core services") (Chart 8). Looking ahead to the trend of inflation in the United States, it is expected to remain at a high level in the second quarter, with energy, housing, and non-residential core services prices likely to be high, and in the third quarter, inflation is likely to fall due to base reasons and the lagged response of rents to housing prices.
The reasons for this are: 1) assuming that oil prices stabilize at $80-90/bbl, the impact of oil prices on U.S. inflation may have a positive contribution in the second quarter, but weaken in the third quarter (Chart 9), and 2) the housing sub-component has a relatively stable lagged correlation with home prices. We estimate that housing inflation is expected to fall in the second half of this year based on the previous decline in home prices (Chart 10) (refer to our report "U.S. Inflation Revisited: A Rent-Based Perspective"), and 3) non-housing core services inflation is highly variable and has rebounded quarter-on-quarter (Chart 11), while the Q1 GDP data shows that U.S. services consumption remains strong, which may increase the stickiness of "super-core services" inflation, which is also the part of the Fed that is highly vigilant.
On the policy front, the Fed may not be "confident" to cut interest rates earlier than September. We have lowered the number of rate cuts for the year to one, with the first rate cut likely in Q4. On the market front, the "tightening trade" theme is likely to continue in Q2: on the Treasury front, the 10-year Treasury rate volatility is expected to pivot at a relatively high level of 4.6% in Q2 (the 10-year Treasury rate cap could widen to close to 5% if market rate cut expectations continue to fall to 0, Chart 12); The widening of negative risk premiums (above 0.5 percentage points for the S&P 500, Chart 13) and the increased uncertainty of the earnings outlook suggest that US equities are still under some adjustment pressure.
Risk warning: the U.S. economy is downside more than expected, U.S. inflation is falling more than expected, U.S. financial risks are rising more than expected, and non-U.S. economies and policies are changing more than expected.