Overview: While there were no major surprises in the economic data released over the past week, the investor outlook for economic growth dropped a bit. As a result, mortgage rates ended the week a little lower.
Keeping inflation in check is a top priority for Federal Reserve officials, and the Personal Consumption Expenditures (PCE) Price Index is their favored indicator. In December, core PCE, which excludes food and energy to reduce short-term volatility, was 2.8% higher than a year ago, matching expectations. The annual rate of increase has remained at this level for three straight months. Prices of durable goods, which include long-lasting items such as appliances and electronics, fell 0.4% in December, while nondurables rose 0.5%. The Fed has made substantial gains in bringing inflation down from its highly elevated peak in the middle of 2022, but further progress toward its annual target of 2% remains challenging.
Gross domestic product (GDP) is the broadest measure of economic activity. During the fourth quarter of 2024, U.S. GDP rose at an annualized rate of 2.3%, below the consensus forecast of 2.6% and down from 3.1% during the third quarter. As expected, the greatest gains came from spending by consumers and the government, and these categories are viewed as solid indicators of the underlying strength of the economy. By contrast, a decline in inventories subtracted substantially from it, but this category carries less weight because companies eventually will need to build their inventories back up. In other words, it is simply shifting economic activity ahead to the future. Also notable, business investment dropped for the first time in more than three years.
Two other significant economic reports released this week by the Institute for Supply Management revealed mixed results. The ISM Services Index fell to 52.8, below the consensus forecast. However, the ISM Manufacturing Index rose to 50.9, above expectations and the highest level since September 2022. Readings above 50 indicate an expansion in the sector, and those below 50 indicate a contraction. These reports once again emphasize that service companies have outperformed manufacturers over the last few years, although the gap may be shrinking.
Core PCE (annual % change)
Week Ahead
Feb. 7
Employment Report
Feb. 12
Consumer Price Index (CPI)