GDP Jumps – April 2019 Edition

The big news this week was Friday’s GDP report, and it was favorable for mortgage rates. As a result, rates ended a little lower, ahead of several major economic releases next week.

While the headline figure for first quarter GDP, the broadest measure of economic growth, was much stronger than expected, mortgage rates declined after its release. This was due to the details of the report. First quarter GDP increased 3.2%, which was far above the consensus forecast of 2.3%, and was up from 2.2% growth during the fourth quarter. This was the best reading for Q1 since 2015, and it took place despite an estimated 0.3% loss in growth resulting from the government shutdown.

However, a closer look revealed a couple of factors which were much more positive for mortgage rates. First, the broad measure of inflation contained in the report was much lower than expected during the first quarter. In addition, the surprising strength was seen in inventories and exports, which are volatile from quarter to quarter and thus are viewed by investors as less informative. The “core” components such as consumer spending and business investment, which better reflect the underlying trend in the economy, showed slower growth than during the previous quarter, and the housing sector again was weak.

The other news from the housing sector released this week was mixed. In March, sales of previously owned (existing) homes were weaker than expected and 5% lower than a year ago. On the other hand, sales of new homes surprised to the upside and were at the highest level since November 2016. Since new home sales represent signed contracts, while existing home sales are based on actual closings, the new home sales report is a more forward-looking indicator of housing market activity.

Looking ahead, it will be a packed week. The next Fed meeting will take place on Wednesday. No change in rates is expected, and investors will be looking for guidance about future monetary policy. The monthly Employment report will be released on Friday. As usual, these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. In addition, the core PCE price index, the inflation indicator favored by the Fed, will be released on Monday. The ISM national manufacturing index will come out on Wednesday and the ISM national services index on Friday.

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