Friday, April 28, 2023

Good GDP, income, and spending growth, but also moderation and future worries.

A couple of big macoreconomic reports have dropped in the last two days, and they can be taken in a lot of different ways.

Let's start with the first look at Q1 GDP, which had a surprisingly low topline number.
U.S. economic activity grew at a slower pace than expected in the first quarter of 2023, flashing further signs that the economy is slowing down as recession fears swirl and the Federal Reserve considers more interest rate increases.

The Bureau of Economic Analysis' advance estimate of first quarter U.S. gross domestic product (GDP) showed the economy grew at an annualized pace of 1.1% during the period, slower than consensus forecasts. Economists surveyed by Bloomberg had the U.S. economy growing at an annualized pace of 1.9% during the first three months of 2022.

The print came in significantly cooler than the previous two quarters, which saw annualized growth at 2.9% and 3.2% respectively.
But then go into the various components, and you see evidence that many parts of the economy were strong for Q1 2023, and could be every bit as good as it was in the last half of 2022.

You can see the real (aka inflation-adjusted) consumption added nearly 2.5% to the GDP number, and that's the highest boost to GDP since Q2 2021, when Americans were spending their last stimulus check. And at the same time, the GDP report shows that Americans had quite a bit more money in their pockets, and upped their savings along with their spending.
Disposable personal income increased $571.2 billion, or 12.5 percent, in the first quarter, compared with an increase of $403.0 billion, or 8.9 percent, in the fourth quarter. The increase in the first quarter reflected an increase in personal income and a decrease in personal current taxes.

Real disposable personal income increased 8.0 percent in the first quarter, compared with an increase of 5.0 percent in the fourth.

Personal saving was $946.2 billion in the first quarter, compared with $758.8 billion in the fourth quarter. The personal saving rate — personal saving as a percentage of disposable personal income — was 4.8 percent in the first quarter, compared with 4.0 percent in the fourth.
That's pretty healthy to me, and if you go back to the chart, you'll see that the biggest drag on the Q1 GDP numbers were a reduction in inventories, which took out 2.26 percentage points of growth. When you remove the often volatile distortions of government and inventories from GDP, we see that consistent, solid levels of growth continued at the start of 2023, and was better than Q4 in several areas.

Real GDP growth, minus Govt and Inventories
Q2 2022 +1.6%
Q3 2022 +3.7%
Q4 2022 +0.5%
Q1 2023 +2.6%

Now that being said, I also will mention that the Q1 figures for GDP consumption are a bit misleading, because it's a quarterly average , and might not necessarily capture where things stood at the end of March. I say this because of the cross-messages of Friday's income and spending report, which showed a small (pre-inflation) increase in incomes last month, consumer spending nearly flat, but saving continued its remarkable rise.

Personal income increased $67.9 billion, or 0.3 percent at a monthly rate, while consumer spending increased $8.2 billion, or less than 0.1 percent, in March. The personal saving rate (that is, personal saving as a percentage of disposable personal income) was 5.1 percent in March, compared with 4.8 percent in February.

And if you dig into the report, it shows that inflation-adjusted consumption declined in both February and March, after that huge (seasonally adjusted) increase in spending for January. And that seasonally adjusted real consumption has declined in 4 of the last 5 months.

So the last 2 months of real declines in consumption will mean that the moving average for Q1 was higher than where we start March at. So does that mean we could see a bad Q2 for consumption, especially as the models plan for more spending as weather warms and school ends?

It also indicates that Americans have indeed adjusted their spending habits to higher interest rates, increasing savings rates from 3% in September to more than 5% in March. With income and spending growth being decent but not huge, and core inflation moderating at a 3-4% annual rate since June, does that sound like a circumstance where interest rates need to keep rising? Especially when we're already at a 5% Fed Funds rate - our highest rate in 16 years?

I would hope the Fed realizes that we can get a soft landing, but only if they stop choking off an economy that has already slowed and adjusted. I would hope they use this information as the reason to take a long-overdue pause from tightening, and see how things work out for the Spring and Summer of 2023.

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