Intelligent Investment
Economic Watch: Slower GDP Growth Shows Effect of Fed Rate Hikes; Inflation Concerns Won’t Last
April 25, 2024 3 Minute Read
Executive Summary
- U.S. GDP increased by 1.6% on an annualized basis in Q1 2024, well below market expectations of 2.4%.
- Weaker growth was accompanied by persistent inflation, with the Core Personal Expenditures Price Index coming in at 3.7% annualized in Q1. Although well above the Federal Reserve’s 2% target, this was in line with CBRE’s forecast of 3.6%. Inflation’s stickiness will keep the Fed cautious before making its first rate cut in July.
- CBRE expects the U.S. economy to slow this year but achieve a soft landing rather than a recession. However, restrictive monetary policy will remain a major headwind.
- We expect that inflation will ease in Q2, causing a gradual drop in the 10-year Treasury yield to 4.1% by year-end. High interest rates will keep real estate investment activity subdued in H1, but modest improvement is still possible in H2.
Weak Q1 GDP growth sets the tone for 2024
Lower inventories and weak trade activity reduced GDP growth to 1.6% in Q1, well below Wall Street expectations of 2.4%. Consumer spending, residential investment and government expenditures slowed in Q1 but contributed to GDP growth. Consumers spent more on services and less on goods. On the inflation front, the Core Personal Consumption Expenditures Price Index increased more than expected to 3.7% annualized in Q1.
CBRE Outlook
While GDP growth missed expectations, core PCE inflation remained well above the Fed’s target and jobless claims fell in Q1. This is leading to concerns about potential stagflation, as evidenced by the continued rise in the 10-year Treasury yield. Our expectation of a soft landing for the economy has not changed, with weaker growth and slower inflation in 2024. We expect better news on inflation next month and that the Fed will cut the federal funds rate by 25 bps in July. This will help ease volatility in bond markets and allow the 10-year Treasury yield to slowly decline, ending the year at 4.1%.
CBRE expects that industrial and office leasing activity will increase modestly this year. High interest rates will remain a headwind for capital markets activity. Investment activity likely will be in line with that of last year, although we expect a slight uptick in the second half of 2024 and a more robust recovery in 2025.
Figure 1: CBRE House View
