A day after soft GDP report, we find US spending and incomes growing strong in March

One day after a disappointing GDP number of 1.6% was released from the Bureau of Economic Analysis, the BEA came back today to tell us that Q1 ended strong when it came to income and spending.

People’s incomes rose 0.5% in March; spending grew 0.8%. Both figures are in current dollars.https://t.co/eDZgP9dKNk

— BEA News (@BEA_News) April 26, 2024

March PCE core MoM came in as expected +0.3%, while PCE core YoY +2.8% vs +2.7%E. We will hear talk today that while inflation is OK, inflation progress is “stalling” which gives the Fed license to hold off on cutting rates until late-2024. pic.twitter.com/4zAB2wgrEU

— Gary Black (@garyblack00) April 26, 2024

7/A higher pace of underlying real spending growth suggests #consumption doesn't support disinflation either. And as underlying #inflation trends likely remain more in line with 3% core PCE #inflation than 2% at least into Q2, the #Fed is unlikely to cut rates this summer.

— Jan J. J. Groen (@jjj_groen) April 26, 2024

Sure, the media wants to make the 0.3% PCE inflation index a major part of this report. But given that the BEA told us yesterday that the same gauge went up by a 3.5% annual rate in Q1, 0.3% would be what we’d expect.

What we didn’t know is that spending and income growth picked up at the end of the quarter, well above the rate of inflation. Real Personal Consumption Expenditures were up 0.5% for March, and Real Disposable Income was up 0.2% last month. Multiply that by 12, and both stats are more than double the Q1 annualized rates of 2.5% consumption growth and 1.0% growth in real disposable income.

Even more heartening is that wage and salary growth had a second straight month of strong growth (0.7%, just like February), which are the largest back-to-back month increases since the Summer of 2022. But we aren’t seeing anything close to the 8-9% inflation rates that we were seeing in the Summer of 2022, so this translates into real wage and income gains instead of catching up to price hikes.

My only concern with this report is the fact that the increase in spending ($172.2 billion on an annual basis) was ahead of the $122.0 billion increase in income for March. This means that the savings rate fell to 3.2%, which is well below the 5.2% rate we had this time last year, and back down to the levels we saw in 2022.

Put it together, and this indicates that we are far away from recession, and in fact, the US economy was likely accelerating as the quarter ended. The one time setback in inflation-adjusted growth and spending that happened in January (largely due to price hikes at the start of the year) has been overcome, and it portends a strong start for Q2.

So no, I don't think the slowdown to 1.6% GDP for Q1 reflects anything beyond a jump in imports, and isn't a sign that we are heading to stagnation for the rest of the year. It doesn't necessarily mean things are clear and easy, and we especially need to see if corporations try to take advantage of the strong consumer spending and wage growth by jacking prices and profits higher. But with oil and gas prices plateauing in April and unemployment claims staying low, I would hope we see some of the economic and monetary fear-mongering calm down as we get the monthly data reports between now and Memorial Day.