Summary
Consumer spending may not be quite as strong as it appears, but an underappreciated dynamic propping up the consumer is the tailwind from slowing inflation amid still elevated wage gains. The PCE deflator did not cool enough to stay the Fed’s hand from another rate hike in May.
Can’t stop me now?
Personal spending notched another modest gain in March increasing by $8.2 billion in the month. On the face of it, it looks like the consumer cannot be stopped. Not by a pandemic, not by the highest inflation in 40 years nor the rate increases meant to tame that inflation, not even by market gyrations amid the first major bank failures since the financial crisis. This was also a theme that emerged from yesterday’s Q1 GDP print, essentially that growth is being sustained by an ever-resilient consumer.
The staying power of the consumer was certainly a dynamic fully in play last year, but we think that is the wrong take-away from the GDP report as well as today’s details on March spending in particular. Here’s why: aside from a pop in January (which was admittedly the biggest surge in almost two years), it’s been a downhill ride since November for consumer spending; especially after adjusting for inflation. Real consumer personal outlays actually fell, albeit very mildly in March. Still, factoring in today’s print, real consumer spending has now contracted in four of the past five months.
So the 3.7% annualized growth rate for Q1 PCE is entirely due to January’s surge. The spending details reveal that almost half of that month’s increase was attributable to motor vehicle sales alone, perhaps reflecting some healing in supply chains. The composition of spending for March in particular is also reflective of a theme that informs our own forecast and that is the transition to services (chart). Outside of a price-related rise in gasoline sales, the top categories for spending last month were housing and utilities followed by healthcare spending. That is hardly the spending profile of a heedless consumer on a spending spree.