The week’s news centered on the core personal consumption expenditure price index (PCE)— the Federal Reserve’s preferred gauge for inflation—while other attention was given to the second Q1 GDP report and personal spending figures. These reports largely came in line with or better than expectations, but the longer-term forecast weighed on investor enthusiasm as poor Treasury auctions, mixed corporate results, and Fed rhetoric cloud the outlook. Ahead of the PCE report on Friday, investors were on edge as prices have regularly come in above expectations so far in 2024, raising concerns for higher-for-longer policy implications. By the end of the week, the S&P 500 Index traded lower by 0.5% while the US Aggregate Index was flat.
Cooling Economy: Revised Data Showed Softer Consumer Spending
Real GDP (QoQ) vs Real Personal Spending (QoQ)
Source: Bloomberg, Bureau of Economic Analysis.
On Thursday, the Bureau of Economic Analysis reported that Q1 Gross Domestic Product (GDP) grew at a slower pace than initially estimated, pulled lower by revised goods spending. GDP increased 1.3% annualized in the first three months of 2024, coming in below the previously reported rate of 1.6%. Personal spending fell to 2.0% at the second reading, after initially coming in at 2.5% in the advance (first) report. Real Gross Domestic Income (GDI) – an alternative measure of economic activity on the income side—slowed to 1.5%, compared to 3.6% in Q4. The deceleration in spending and moderating income gains point to positive developments for US central bankers determined to slow the economy—as well as Wall Street’s hopes for rate cuts. Business spending was also revised down to just 0.3% from the advance estimate of 2.1%, reflecting reports of pressured margins in Q1. Consumer pushback against price increases combined with rising input costs are squeezing profit margins according to the latest Fed Beige Book. Higher interest rates, waning pandemic-era savings, and slower income growth are some of the key factors weighing on American households and businesses.
Underlying US Inflation Posts Smallest Gain This Year
Inflation-Adjusted Spending (MoM) vs PCE ex-Food, Energy (MoM)
Source: Bloomberg, Bureau of Economic Analysis.
On Friday, the core personal consumption expenditures deflator (excluding food and energy), increased 0.2% from the prior month, coming in line with expectations. The April reading marked the smallest advance of the year, with the annual pace of 2.8% being the slowest since March 2021. The combination of cooling core inflation with moderating incomes and spending will be welcome developments ahead of the Fed’s June meeting. Notably, even as annual inflation measures held steady, disinflation is more pronounced under the surface. Durable-goods prices are declining, and healthcare and housing inflation—some of the stickier categories of services inflation—are showing signs of easing. While this week provided good signs that the economy is cooling, Fed Governors have been positioning for a “wait and see” approach as they gain confidence that inflation is sustainably moving towards the long-term target before starting rate cuts.
– Written by Eric Schmitz, CFA