Dive Brief:

• During the second and third quarters the annual pace of economic growth will likely sink below 1%, weighed down by high inflation, rising household debt, depleted pandemic-period savings and the highest borrowing costs in two decades, the Conference Board said.
• The economy faces “serious headwinds to growth,” Justyna Zabinska-La Monica, senior manager of business cycle indicators at the Conference Board, said in a statement Friday. She cited a 0.6% decline in the organization’s Leading Economic Index in April following a 0.3% decrease in March.
• “Deterioration in consumers’ outlook on business conditions, weaker new orders, a negative yield spread [between the 10-year Treasury note and federal funds rate] and a drop in new building permits fueled April’s decline” in the index, she said.

Dive Insight:

Several recent signals from the economy — ranging from price pressures to housing starts — suggest that the expansion is slowing after defying recession predictions last year and growing at a 1.6% annual rate during the first quarter.

“Economic activity increased at a strong pace last year but may have moderated early this year,” Federal Reserve Governor Michelle Bowman said in a speech Friday.

In a sign demand is cooling, the consumer price index excluding volatile food and energy prices rose last month at the slowest pace this year, giving Fed policymakers some relief from a pummeling of first-quarter data that shook confidence inflation will steadily slow to their 2% goal.

The so-called core CPI gained 0.3% in April compared with 0.4% during the prior month, and eased to 3.6% on an annual basis from 3.8% in March, the Bureau of Labor Statistics said Wednesday.

Higher borrowing costs and the waning of savings built during the pandemic have prompted consumers to cut spending.

Retail sales in April were unchanged from March and lower than expected by economists, the Census Bureau said Wednesday. Growth in retail sales in March was marked down to 0.6% from 0.7%.

Household debt rose $184 billion, or 1.1%, during Q1 compared to the prior quarter, hitting a record $17.69 trillion, the New York Fed said Tuesday.

More recently, consumer sentiment slumped 13% in May after three months of little change as measured by a University of Michigan survey. Spending by consumers fuels roughly 70% of economic growth.

Unemployment, inflation and interest rates have clouded the outlook among consumers, the university’s Consumers Surveys Director Joanne Hsu said in a statement, noting that sentiment fell to a six-month low.

Unemployment last month rose to 3.9% from 3.8% in March as organizations hired 175,000 workers in the lowest gain in six months, according to the Department of Labor.

“Every leading labor market indicator we follow has deteriorated markedly in recent months, pointing to a clear slowing in payroll growth in the second and third quarters,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said Friday in an email to clients.

"None of these numbers alone are definitive, but so many separate measures now tell the same story that much weaker GDP and payroll growth has to be our base case,” he said, adding that payrolls may fall sometime in the next few months.

The manufacturing and homebuilding sectors show little sign of job-creating dynamism. Housing starts rose to 1.36 million in April, 5.7% higher than in March but 5.4% below the average during the previous 12 months, the Census Bureau said Thursday.

Meanwhile, manufacturing output fell 0.3% in April, the Fed said Thursday. The decline is “a rebuke to the idea that the sector is starting to turn a corner following its prolonged, though gentle, slump,” Shepherdson said.

After the release of the data reports Thursday, the Atlanta Fed marked down its forecast for the annual rate of GDP growth this quarter to 3.6% from 3.8%.

During Q1 growth “was temporarily dampened by volatile categories, like inventories and net exports, and over the past few months, including recent data revisions, consumers appear to have pulled-back on goods spending through April,” Bowman said.

“Still, consumer services spending has remained strong, and residential activity and business investment in equipment and intangibles strengthened,” she said.