Economy Heats Up; Will Inflation be Transitory?

The first look at Q1 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter (q/q) annualized rate of expansion of 6.4%, versus the Bloomberg consensus estimate of a 6.7% gain after the unrevised 4.3% increase in Q4. Personal consumption rose by 10.7%, compared to forecasts of a 10.5% gain, and following the unadjusted 2.3% increase recorded in Q4.

On inflation, the GDP Price Index came in at a 4.1% increase, above expectations of 2.6% gain, and versus the unrevised 2.0% rise seen in Q4, while the core PCE Index, which excludes food and energy, moved 2.3% higher, compared to expectations of a 2.4% increase, and following the unadjusted 1.3% gain in Q4.

Weekly initial jobless claims came in at a level of 553,000 for the week ended April 24, compared to the Bloomberg estimate of an acceleration to 540,000 from the prior week's upwardly revised 566,000 level. The four-week moving average declined by 44,000 to 611,750, and continuing claims for the week ended April 17 increased by 9,000 to 3,660,000, north of estimates of 3,590,000. The four-week moving average of continuing claims declined by 23,250 to 3,684,000.

Pending home sales rose 1.9% m/m in March, short of estimates calling for a 4.4% m/m increase after February's unfavorably revised 11.5% decrease. Sales were 25.3% higher y/y, slightly below the 27.5% increase expected, and compared to February's negatively revised 3.8% decline. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales.

Yesterday, the Federal Open Market Committee (FOMC) opted to leave its stance and interest rates unchanged, as was widely anticipated, while also noting that economic activity and employment have strengthened amid progress on vaccinations and strong policy support. In his scheduled press conference following the statement, Chairman Jerome Powell once again said the Fed is committed to achieving its dual mandate of price stability and full employment, and that it maintains the flexibility to provide further accommodation. Powell further reiterated the Fed’s commitment to using its full range of tools to help ensure a robust recovery.

The Fed strengthened its outlook for the economy, noting in the FOMC’s statement, “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened.” In addition, the Fed highlighted that the “sectors most adversely affected by the pandemic remain weak but have shown improvement.” With regard to one of the hottest topics lately—inflation—the Fed used a word we expect to hear/read a lot over the next few months: “Inflation has risen, largely reflecting transitory factors.”