Mediocre April and lower revisions for income, spending. Fed should cut sooner

On Friday, we got the always-important income and spending report this time for April. And the figures weren’t that great.

Personal income increased $65.3 billion (0.3 percent at a monthly rate) in April, according to estimates released today by the Bureau of Economic Analysis (tables 2 and 3). Disposable personal income (DPI) —personal income less personal current taxes—increased $40.2 billion (0.2 percent) and personal consumption expenditures (PCE) increased $39.1 billion (0.2 percent).

The PCE price index increased 0.3 percent. Excluding food and energy, the PCE price index increased 0.2 percent (table 5). Real DPI decreased 0.1 percent in April and real PCE decreased 0.1 percent; goods decreased 0.4 percent and services increased 0.1 percent.

In addition to the tepid numbers for April (both in inflation and in income and spending), the bigger story to me is previewed with this paragraph.

Estimates have been updated for October through March. For October through December, estimates for compensation, personal taxes, and contributions for government social insurance reflect the incorporation of updated fourth-quarter wage and salary data from the Bureau of Labor Statistics Quarterly Census of Employment and Wages program. Revised and previously published changes from the preceding month for current-dollar personal income, and for current-dollar and chained (2017) dollar DPI and PCE, are provided below for February and March.

I had a hint on the lower wage growth when I looked at the QCEW figures last week, and then the lower revisions of GDP that hit on Thursday were largely due to lower consumption figures. So what Friday’s report showed wasn’t that much of a surprise.

But when you put it up next to the previously-reported numbers, it should cause a slight change in your understanding of what the economy was doing at the end of 2023 and Q1 of 2024. For example, income growth wasn’t as good as we originally thought, and wages and salaries actually dropped in October 2023 and continued to lag the data that we had before Friday.

And then when you take out taxes and adjust for inflation, it shows that US disposable income is lower now than the levels that we thought we were at when 2023 ended.

On the spending side, revisions for consumption in February and March and soft numbers for April mean that PCEs are at a lower level in this report than what we thought we had in March.

So this indicates that the job market may have had a bigger slowdown at the end of 2023 than we knew of, and that Americans’ spending is moderate and not at a rate that would fire further inflation due to excess demand.

Which should make you ask why interest rates are staying at 23-year highs. PCE inflation seems to be steady at just under 3%, and GDP growth is moderating from the strong numbers we saw in the second half of 2023. We also see that pending homes sales dove in April as mortgage rates went back above 7%, as higher rates are raising the cost of buying a house and locking people into the homes in they have.

3% inflation is not anything that limits the economy, but interest rates that are higher than they should be certainly can limit it. Especially when the higher interest rates may well be a reason that housing prices stay high, which is straining everyday Americans’ pocketbooks.

While the overall economy and especially the job market is still in good shape, it doesn’t mean that things are booming like we thought they were. I would hope that the Federal Reserve would also recalibrate their understanding of where the economy stands, and lower these punitive interest rates sooner than later.