The United States Commerce Department reported today that the U.S. economy expanded at a 2.4% rate in the first quarter of 2013. That was within the range predicted by most economists and is considered to be moderate growth. Strong economic growth is usually in the 3% or more category while weak economic growth is generally under 1%.
The Commerce Department report revealed that consumer spending fueled the increase, rising by a 3.4 percent annualized rate in the first quarter. Rising home prices and a buoyant stock market, and declining unemployment have helped improve many Americans’ bottom line and also raised overall consumer confidence.
Government spending fell for the 10th time out of the last quarters as military spending declined. Both the winding down of the wars in Iraq and Afghanistan have contributed to the decrease in government outlays. While positive from a budge deficit standpoint, falling government spending has helped to constrain GDP growth.
So, what does all of this mean from an interest rate perspective? Steady as it goes. Growth is not strong enough to increase inflation, which remains in the 1% range. The Fed has committed to keeping inflation below 2% so the central bank still has wiggle room to keep rates low.
Until GDP growth reaches the 3% range, it’s hard to envision unemployment falling below 6.5% and inflation breaching the Fed’s target of 2%. Until that happens, deposit rates will continue their gradual decline.
Mortgage rates though, more sensitive to longer-term trends have already begun to move higher in anticipation of stronger growth later in the year. Look for mortgage rates to continue to rise if growth continues, as I expect it will.