Weekly Update 02/28/2025: Inflation As Expected
- New home sales below expectations
- U.S. economy grows at healthy pace
- Apple to make $500 billion investment
U.S. GDP, labor market conditions and confidence
The Bureau of Economic Analysis says gross domestic product (GDP) rose at an unrevised 2.3% annualized pace in the fourth quarter. This was the second report about the economy with the advance reading out last month. The metric fell slightly from the 3.1% annualized pace seen during the third quarter of last year and was down from the 3.2% annualized rate recorded in the fourth quarter of 2023. For all of 2024, GDP expanded at a 2.8% pace. Consumer spending, which comprises nearly two thirds of GDP, rose at a 4.2% pace and continues to support growth even in the face of higher interest rates and stubborn inflationary pockets. The question is: Will this environment continue or are clouds gathering on the horizon?
In a separate report from the Labor Department, initial applications for unemployment benefits rose 22,000 last week ended February 22 to 242,000. That was the highest level since October and above the median forecast in a Bloomberg survey of economists of 221,000. The increase in claims coincides with job cuts at corporations and federal agencies. The Department of Government Efficiency has been targeting several agencies for headcount eliminations. In Washington, D.C., the number of claims rose to the highest level since March 2023. Claims filed by fired federal workers are not included in these weekly initial claims numbers. However, those who do business with the federal government include many contractors and other entities which are included in the stat. Starbucks, Meta Platforms and Southwest Airlines are just some of the corporations announcing wide-scale staff reduction plans.
The air of uncertainty has definitely affected the psyche of consumers. The Conference Board’s gauge of confidence fell 7 points in February to 98.3, which is the third consecutive decline. A decline of that magnitude was the most since August 2021 and was across age groups and incomes. Consumers were more pessimistic about current and future labor market conditions, and perceptions of present and future financial situations worsened. These figures, combined with the weekly jobless tally, suggest that households are more hesitant in the face of tariff threats and inflationary conditions. Today, the market was poised to receive the latest news about the Fed’s preferred measure of inflation.
Housing Market
Purchases of new single-family homes fell a whopping 10.5% last month to a 657,000 annualized rate, according to data from the Census Bureau. That was below the median estimate of economists surveyed by Bloomberg who called for a figure of 680,000. That was a 3-month low as sales declined in the South, Midwest and Northeast. Sales in the South declined by almost 15% as the region saw harsh winter weather dampen buying desire in the nation’s biggest homebuilding region. The number of new homes available for sale rose to 495,000, the highest since December 2007.
Higher input prices are a key headwind to the market. Proposed 25% tariffs on goods from Canada and Mexico and the current 10% levy on China—all of which might go higher—could increase the cost of building a typical home by as much as $29,000 according to homebuilders. More than 70% of softwood lumber and gypsum products come from Canada and Mexico, respectively, according to the National Association of Home Builders. The current U.S. supply chain of lumber is limited, and harvesting is costly. Plus, the U.S. is not yet at its peak building season which ramps up in the spring and continues through summer. Lumber prices are already up 14% year-to-date. Builders PulteGroup and Toll Brothers have already noted on recent earnings calls that they have more spec homes in stock than usual. Spec homes are houses that are built without a committed buyer.
Selling prices, meanwhile, continue to rise. The median sales price rose 3.7% from a year ago to $446,300 last month, the highest for that month on record. Even though mortgage rates dropped last week, they are still more than double the rate from 2021. The last thing the market needs is job uncertainty which would likely strike a crippling blow to the industry just as the spring selling season is getting underway. Next week, the monthly jobs and unemployment report will be released by the Labor Department. Stay tuned!
Personal Income and Spending
The personal consumption expenditures price index rose 0.3% in December. Excluding food and energy, the so-called core index figure rose 0.3%. On a year-over-year basis, the overall and core figures rose 2.5% and 2.6%, respectively. These figures from the Bureau of Economic Analysis were in line with the consensus estimate taken in a survey of economists by Bloomberg. Core services prices rose 0.2% and core goods prices were 0.4% higher last month versus December.
Personal income rose 0.9%, surpassing the expectation of a 0.4% increase. Annual Social Security cost-of-living adjustments drove that figure higher than anticipated as well as higher dividend, rental and interest income. Meanwhile, personal spending fell 0.2%. That was below the consensus figure of a 0.2% rise for the month. January was also facing tough comparisons as December’s personal spending figure was revised higher to +0.8%. Declining auto sales weighed on the spending figure as well as the previously mentioned slump in consumer confidence. Consumers may have frontloaded purchases of big ticket items in anticipation of potential tariffs. Recreational goods and vehicles, clothing and footwear and furnishings also registered declines in January versus increases the prior month.
Company Events
SGK writes additional weekly commentary for clients of the firm detailing recent events and earnings of core equity holdings.
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