EconoFACTS

May 27, 2022 | 09:04

Solid U.S. PCE Took Us Off the Highway to the Danger Zone

Economist

Senior Economist and Managing Director
Economics

Jennifer has been with BMO Capital Markets Economics for over two decades and is perhaps best known for her high... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been with BMO Capital Markets Economics for over two decades and is perhaps best known for her high... (Read more)

The April data so far in the U.S. won't 'take your breath away', nor will one be able to see the 'heaven in your eyes' but they may have taken us a little off the "highway to the danger zone'.... the inflationary danger zone. And the recessionary one.

Never count out the U.S. consumer .....

Personal spending jumped 0.9% in April (beating expectations.... even BMO's above-consensus call), on the heels of the upwardly revised 1.4% gain in March. But yes, those are nominal figures. In real-terms, spending grew 0.7%, the most in four months, following an upwardly revised March of 0.5% (was 0.2%). How could one afford this? There was support by a firm 0.6% increase in wages & salaries, which is, granted, the smallest increase in three months but still solid. And that is what one should be watching ... not necessarily total personal income (which was up 0.4%). Having a steady paycheck is key and the still-tight job market assures that support. But high inflation is eating away at what one can buy.... hence, the saving rate was drawn down for the fourth straight month and at 4.4%, is the lowest since 2008.

What were consumers spending on in April? Mostly durables (+2.4%), which is no surprise after yesterday's GDP revision. Cars (+3.9%), recreational goods & vehicles (+2.1%), clothing and (+1.9%), recreation services (+1.5%), dining out (+1.3%).... in other words, discretionary items.

The core PCE deflator was steady... up 0.3% for the third month in a row. Although this slowed the y/y pace to 4.9% from three straight months of over 5% readings, we need to see the monthly increases cool more meaningfully before the Fed can breathe.

Two other releases were also positive for the start of Q2:

The goods trade deficit narrowed to $105.9 bln from a record $125.9 bln in March. This comes as exports rose 3.1% while imports fell for the first time in nine months, down 5.0%. Perhaps demand was being satisfied by more goods domestically? Wholesale inventories were up a solid 2.1% in April, though retailers rose just 0.7%.

Bottom Line: This is a solid start to Q2 and introduces some upside risk to the quarter. However, with inflation still near 40-year highs and demand still strong, the Fed will continue on its tightening path.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics