State of the US Economy
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Article Type
Insights
Topic
Macro
Published
April 30, 2024
Read time
5 mins
Author
Frank Rybinski, CFA
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Although the first-quarter GDP reading appeared disappointing at first glance, a closer look at the underlying data shows it may not be as bad as the top-line reading suggests. For one thing, although US economic growth cooled to a 1.6% seasonally adjusted annualized rate (3% year over year) in the first quarter, the reading was weighed down by a large contraction in the contribution from net international trade.

 

More importantly, the total consumer (consumption + housing) grew at a +3.0% annualized rate (+2.5% year over year), fueled by solid growth in the labor income proxy (also at +2.5% year over year in real terms). This bolsters our consumer “sweet spot” thesis , which is that inflation is falling faster than nominal wages and, as a result, boosting real spending power. This dynamic wont last forever, but while it does occur it supports consumption.

 

Consumer "sweet spot"

Inflation falling faster than nominal wages -> boosts spending power

 

Consumer "sweet spot" Inflation falling faster than nominal wages -> boosts spending power

 

Sources; Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics. Data as of April 2024.

 

Concern: Growth capex is still moribund

 

Capital expenditures hasnt grown in the past seven quarters. In fact, its now exactly where it was in the fourth quarter of 2022. Thats concerning because if a business outlook is good, its capital expenditures should be growing. And thats not currently the case, which tells us that companies (in aggregate) are being relatively cautious about the business environment.

 

Growth Capex-Equipment and R&D

 

Growth Capex-Equipment and R&D

 

Source: Haver Analytics. Data as of April 2024.

 

Inflation: The play

 

If disinflation were a stage play, the third act, which centers on services prices, is proving to be the longest. Although core PCE is displaying a downward trend, the message seems lost on the so-called super core components (i.e., core services ex-housing), which is proving to be quite sticky.

 

   

1Q22

1Q23

1Q24
PCE - Core

Q/Q AR

6.0%

5.0%

3.7%

YoY

5.5%

4.8%

2.9%
PCE - SuperCore

Q/Q AR

5.2%

5.2%

5.1%

YoY

5.0%

5.0%

3.5%

 

Sources: Bureau of Economic Analysis, Haver Analytics. Data as of April 2024. 

 

In addition, the year-over-year comparisons are going to get tougher as we head into summer. The core inflation data last year between June and December was very benign (the average print was 0.16%). So, if those low readings arent replaced with similar or lower numbers, look for year-over-year inflation data to accelerate. That is the core risk to forecasts that include any rate cuts for 2024.

 

Better news from the Beige Book

 

Still, all hope is not lost on the inflation front. The latest Beige Book release (which is comprised of episodic anecdotal summaries of economic activity in the 12 Federal Reserve Bank regions) displayed a consistent disinflationary theme throughout, both on the goods and the service sides. The key for disinflation to materialize is the degree to which these broad anecdotal themes manifest themselves in the data over the coming months. If they dont, the Federal Reserve is unlikely to cut interest rates at its September and December meetings.

Important information

Author

Frank Rybinski, CFA
Head of Macro Strategy
Frank Rybinski, CFA, is head of macro strategy responsible for guiding the firm’s global macroeconomic view as it pertains to tactical and strategic asset allocation. This includes analysis of the economy, monetary & fiscal policy, interest rates and the relative value between asset classes.  
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