In this Issue

While economic growth has moderated slightly, the labor market remains resilient with the unemployment rate remaining below 4% for the 26th consecutive month, the longest streak since the 1960s.

Housing demand is on the rebound, but with mortgage rates still averaging 6.8%, many prospective homebuyers continue to be priced out of the market.

A preview of the spring homebuying season shows a healthy recovery compared to last year and first-time homebuyers continue to carry demand, making up almost 6 out of 10 purchase applications.

Recent developments

U.S. economy: The U.S. economy continued to grow at a seasonally adjusted annual rate (SAAR) of 3.4% in Q4 2023 as per the third and final estimate of the Real Gross Domestic Product (GDP) closing out 2023 at 2.5% SAAR compared to the 2022 annual levels.1 While growth in Q4 2023 softened compared to the 4.9% growth in Q3 2023, it remains above estimates of long-term potential growth. The upward revisions to the third estimate for Q4 2023 predominately reflect an increase in consumption spending, which contributed 2.2 percentage points to overall growth. While government spending increased 4.6% in the third estimate compared to 4.2% in the second estimate for Q4 2023, government spending is moderating compared to the 5.8% increase in Q3 2023.

Private investment increased 0.7% over Q4 compared to the 10.0% increase in Q3. Residential investment remained positive but slowed down from the 6.7% increase in Q3 2023 to 2.8% in Q4 2023. Private Domestic Final Consumption ticked down in Q4 2023 to 3.5% compared to the 3.6% growth rate in Q3 2023. Overall, growth is moderating and is expected to continue to trend downward through 2024.

With the third estimate of Real GDP, the Bureau of Economic Analysis also releases the Gross Domestic Income (GDI) data. Real GDI increased 4.8% in Q4 compared to 1.9% in Q3 2023. The average of GDP and GDI is often considered a supplemental measure of U.S. economic activity, and as per that measure, growth increased 4.1% in Q4 as compared to the 3.4% growth in Q3 2023.

The labor market remained robust with nonfarm payroll employment increasing by 303,000 in March 2024, per the Bureau of Labor Statistics (BLS). Employment for January and February was revised up by a combined 22,000. The unemployment rate inched down from 3.9% in February to 3.8% in March, with decreases in Asian and Hispanic unemployment rate over the month. Unemployment remains below 4% for the 26th consecutive month, the longest streak since the 1960s. Average hourly earnings for all employees on private nonfarm payrolls rose 0.3% month-over-month, and compared to a year ago, average hourly earnings increased 4.1%. Overall, the jobs report is indicative of a resilient labor market signaling the likelihood of continued support for consumption spending and thereby, for economic growth.

Job openings remained steady at around 8.8 million in February 2024, according to the BLS Job Openings and Labor Turnover Survey (JOLTS). The ratio of job openings to unemployed, a metric that the Federal Reserve has been tracking to gauge the strength of the labor market, declined slightly to 1.36 in February from a revised reading of 1.43 in January, indicating fewer job openings per unemployed. While on average there are more job openings than unemployed at the national level, there is substantial variation in this ratio across the states. For example, as of January, the latest available state-level data, California, Arizona, New Jersey, and Washington, had more unemployed than job openings while states such as Maryland and North Dakota had more than three jobs per unemployed person in the state.

Inflation as measured by the price index for Personal Consumption Expenditures (PCE) excluding food and energy came in below consensus expectations, increasing 0.3%. This brought the annual core PCE rate down to 2.8% from 2.9% in February. However, the overall level of inflation remains above the Federal Reserve target of 2.0% with significant upside risks. With inflation remaining above the target, the likelihood of the Federal Reserve cutting the federal fund rates is pushed further out to the second half of the year. Following the March CPI report, market expectations of the federal fund rate cuts also fell significantly.2

The higher interest rates are impacting consumer credit performance. While serious delinquency rates for credit cards and autos are increasing, mortgage performance has remained better than the other sectors (Exhibit 1). Credit cards have had the highest increase in transitions into serious delinquency, followed by auto loans. As a result of higher for longer rates and sticky inflation, consumers are relying more on credit card debt and consequently, transitions into delinquency are above levels seen prior to the pandemic.

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