As the last business day of the month hit on Friday, we got the always-important income and spending report for April. That was a month that started with the Trump Administration’s announcement of tariffs and the loss of more than 11% in the S&P 500 in a week, and then most of those losses were recovered by the end of April.
The same report has inflation information for consumers, which would tell us if those tariff announcements were already raising prices, which would encourage the Fed from backing off from lowering interest rates from its still-elevated levels.
So what did we get? The Fed's preferred Core PCE Price Index rose 0.1% in April, matching March's revised gain and consensus estimates, signaling that early-month tariffs had little impact on underlying inflation.
Excluding food and energy, core PCE climbed 2.5% year-over-year, also in line with forecasts and down from a 2.7% pace in March, while the headline PCE measure, which includes all items, increased 0.1% month-over-month and 2.1% annually. The data echo April's CPI report in showing muted tariff effects, as consumers shifted spending patterns rather than letting price spikes feed through to core inflation.
Personal income jumped 0.8% more than double the 0.3% consensus while personal consumption expenditures slowed to 0.2% growth, down from March's 0.7%....
A big reason for the boost in incomes was due to an increase of nearly $108 billion in Social Security benefits, which is odd because the annual inflation-indexing boost of benefits happens in January, not April. So how did this big jump happen?
Because of
a bill signed by Joe Biden before he left office earlier this year that restored benefits to a sizable number of American workers.
In January, two provisions—the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO)—that reduced Social Security benefits for millions of workers were repealed after bipartisan efforts in Congress.
Signing the act into law, former President Joe Biden said it would boost Social Security benefits by an average of $360 a month for more than 2.8 million recipients.
The WEP reduced Social Security benefits for individuals receiving pensions from public-sector jobs—such as those held by state and federal employees—that did not require Social Security payroll tax contributions. This reduction applied even if they contributed to Social Security through other employment and qualified for benefits.
The GPO reduced spousal or survivor benefits for retired federal, state and local government workers who did not pay into Social Security funds through their payroll taxes.
It continues an unusual trend where US income growth has been driven more by one-off bits of non-job income every month of 2025 instead of wages, salaries and other work-related compensation. Compensation of employees accounts for more 3/5 of overall US income, but was less than 2/5 of income growth for the first 4 months of this year.
There aren’t going to be continuing sources of non-job income like these for the rest of 2025 (not that I know of, anyway), so that’s not a recipe for sustained income growth in an economy that has more than 2/3 of its GDP based on consumer spending.
Combine that income info with the tanking of the stock market in April, then add the Trumpian-induced chaos from tariffs that were announced and put into place, but not yet being shown on the prices that consumers paid. This may help explain why there wasn’t much of an increase in consumer spending for April (only up by 0.2%, and 0.1% after inflation), and instead we had a big jump in the saving rate.
I also note that there was a slight cutback in durable goods spending after a big increase in March, which seemed to be intended to get ahead of the tariffs that were coming, and mirrors an increase in year-end durable goods spending that happened ahead of Trump’s inauguration.
So is that front-running of tariffs by consumers going to result in another retrench in durable goods spending for May, just as we see a large group of imports for Q1 2025 hit the market? Or is April’s decline just a breather after a big runup, and we will see the higher levels of durable goods spending continue for the rest of Q2 2025? Seems to be an important question going forward.
In general, it seems that the April data shows a lull between the rapid changes and economic concerns that came with the start of Trump Admin 2.0, and with what we see after tariffs affect prices, jobs and production levels. And now that
the TACO trend (Trump Always Chickens Out) is becoming acknowledged by Wall Streeters, media and other Americans, what changes to consumer and business behavior will that cause?
I also thought that the strange recovery in stocks for May would be a boost to consumer sentiment. I think the headlines about the lower stock market in April signaled to everyday Americans that things were going bad, so why wouldn’t the recovery in stocks and warmer weather make people think things were OK?
But there wasn’t much of a rebound in sentiment at all. Consumer sentiment was unchanged from April, ending four consecutive months of plunging declines. Sentiment had ebbed at the preliminary reading for May but turned a corner in the latter half of the month following the temporary pause on some tariffs on China goods. Expected business conditions improved after mid-month, likely a consequence of the trade policy announcement. However, these positive changes were offset by declines in current personal finances stemming from stagnating incomes throughout May. Overall, consumers see the outlook for the economy as no worse than last month, but they remained quite worried about the future.
In fact, consumers’ rating of the current economy was worse in May than in April, with expectations lower than their opinions of the current economic situation.
And despite some breaks and/or delays in tariffs, the Michigan survey shows that Americans are still counting on sizable inflation for the near-future.
Year-ahead inflation expectations were little changed at 6.6%, inching up from 6.5% last month. This is the smallest increase since the election and marks the end of a four-month streak of extremely large jumps in short-run expectations. Notably, long-run inflation expectations fell back from 4.4% in April to 4.2% in May. This is the first decline seen since December 2024 and ends an unprecedented four-month sequence of increases. Given that consumers generally expect tariffs to pass through to consumer prices, it is no surprise that trade policy has influenced consumers’ views of the economy. In contrast, despite the many headlines about the tax and spending bill that is moving through Congress, the bill does not appear to be salient to consumers at this time.
Oh yeah, Big Beautiful Tax Scam 2.0! I’m sure the thought of less support for health insurance and higher interest rates from rising deficits will do wonders for consumers’ views on the economy! (well, for the 2/3 of the country that doesn’t live in a Bubble of BS, anyway).
From what I can see with the data, the underlying economy didn’t change much at all in April, despite all the chaos that was happening in DC and on Wall Street in that month. And given that there hasn’t been a large increase in layoffs or other major damage being obvious in the last month, I wouldn’t think a lot would be different in May’s data either. But it all seems to be a false calm that is masking what’s to come.
It doesn’t seem like what’s coming is going to be good, whether we have more TACOs or not, since the distortions have already happened in the first 4 months of 2025, and the re-adjustment people and businesses make to those idiotic moves will be the story that determines how the economy ends up for much of the rest of this year.
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