Consumption Growth Falls, As Income Growth Increases

Consumption Growth - While April Income Growth Improves

Before getting into Consumption Growth, let's first review the April PCE report. Considering the weak economic reports that have come out in the past few weeks, the April PCE report was solid. This is before the tariffs were announced on consumer goods, but it’s still important since the weakness is mostly cyclical. 

Both real disposable income growth and real consumer spending growth beat estimates. Personal income growth was 0.5% monthly which beat estimates for 0.3% and the high end of the consensus range which was 0.4%. It was above March’s 0.1% growth.

As you can see from the chart below, yearly real personal income growth improved to 2.2%. The gap between yearly spending growth and income growth shrunk which is how the savings rate increased from 6.1% to 6.2%. 

Investors knew this gap would close because the 0.9% decline in the savings rate in March was unsustainable. This gap closed in a good way as disposable income growth improved. On a monthly basis, consumer spending growth was 0.3% which beat estimates for 0.2%. 

It’s impressive that growth beat estimates since the monthly comp got tougher as March’s spending growth was revised from 0.9% to 1.1%. Yearly real consumer spending growth fell to 2.7%.

Let’s look at the details of spending growth. Spending on durables was down 0.4% monthly. That decline was driven by autos which fell 1.7% after rising 9.4%. While auto industry isn’t strong, that tough comparison in March definitely led to this decline. 

Spending on non-durables was up 0.3% as there were broad based gains. Spending on services fell 0.1% which followed 0.4% growth in March. There was broad based weakness.

Core Inflation Hasn’t Been At 2% For 9 Months

Consumption Growth - Headline monthly PCE inflation was 0.3% which matched estimates and was above the 0.2% rate March. 

As you can see from the chart below, yearly headline PCE inflation was 1.5%. It missed estimates for 1.6%, but was above the 1.4% rate in March. Monthly core inflation was 0.247% which was a big spike from the 0.1% rate in March. But it only met estimates. 

Yearly core PCE was 1.6% which met estimates and was higher than last month’s reading of 1.5%.Core inflation has been below 2% for 9 straight months.

Consumption Growth - Low inflation has allowed the Fed to not hike rates this year. 

However, inflation being below 2% has quickly gone from a positive to a negative because of the slowdown in economic growth. We won’t need to worry about inflation being too high in the next few quarters. There are no more hikes on the table for this cycle. Fed is likely to cut rates very soon. 

Specifically, portfolio management services and investment advice inflation increased, but it had little effect on yearly core PCE. The big expenses like shelter and healthcare need to see price increases for there to be any meaningful inflation.

With the recent decline in the breakeven inflation rate and commodities prices, don’t expect inflation to increase in May and June. The 5 year breakeven inflation rate peaked at 1.88% on March 18th. 

As of May 30th, it was at 1.59%. Bloomberg commodities ETF is at $174.72 which is a 13.38% decline from last year. It’s still up 3.1% year to date. But it is headed in the wrong direction as it peaked at $189.66 on April 10th. April PCE inflation rate will likely be an intermediate term high.

Chicago PMI Beat Estimates

Consumption Growth - May Chicago PMI was 54.2 which beat estimates for 53.6 and was above April’s reading of 52.6. It even beat the high end of the estimate range for 53.8. 

Unfortunately, this was a rare positive PMI reading. As you can see from the chart below, the average of the Chicago and Milwaukee PMIs still points to a decline in the ISM PMI. As I will get to in a future article, the May ISM PMI ended up being weak which means this average was correct.

Specifically, the Chicago PMI ended a 2 month skid; it’s still relatively low compared to where it was last year. The new orders index increased above 50 for the first time in 3 months, but backlogs fell below 50 and were the worst part of this report. Hiring grew at the lowest rate since October 2017. Production increased and inventories were above 50 again.

Consumption Growth - Final University Of Michigan Consumer Sentiment Reading

After the preliminary reading of the University of Michigan sentiment report showed consumer confidence was at a 15 year high and expectations were at a 15 year high, the final number fell. That was because of the tariffs and the decline in the stock market. 

We’ve since seen positive confidence readings from the Conference Board index and the Cornerstone Macro weekly survey. But I ended up being correct. Final Michigan sentiment reading was 100 which was down from the preliminary spike of 102.4.

In the second half of May, the index was at a pace of 97.5. To be clear, that’s not bad as the final reading from April was 97.2. If the stock market keeps falling, this sentiment reading will fall further. Since I’m expecting at least a 10% correction, I think the June reading will be below this one. 

Specifically, the final reading showed expectations increased 6.1 points to 93.5 and the current index fell 2.3 points to 110. Inflation expectations for the next year and the next 5 years increased 0.3% to 2.8% and 2.6%. Consumers are wrong to think inflation will increase as the cyclical economic decline is causing prices to fall. 

This weakness looks to be greater than the positive effect on prices coming from tariffs.

Consumption Growth - Conclusion

It’s good to see solid income growth. We will see if that is likely to continue on Friday when the BLS monthly jobs report comes out. Inflation is still below 2% and will likely stay below 2% for the rest of the year because of the cyclical slowdown. 

Average between the Chicago and Milwaukee Fed PMIs was an accurate predictor of the ISM PMI. Consumer confidence fell slightly in the 2^nd half of May opposed to the first half. It will fall further if stocks continue to fall.