EconoFACTS

May 26, 2023 | 09:18

U.S. Consumers and Inflation Spring Ahead

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

American consumers were out in force in early spring and inflation perked up as well...not what the Fed wants to hear. Personal spending jumped 0.8% in April, double market expectations, after a slight (upwardly revised) advance the prior month. Spending volumes spiked 0.5% after a flat March, and if they remain flat in the next two months, real consumer spending will be up 1.6% annualized in Q2...pushing out the long-awaited start of a recession. All major categories showed increases, led by durable goods, but backed up by decent gains in nondurables and services. Beside excess savings and revenge spending, households are finding support from a resilient labour market. Personal income picked up to a 0.4% monthly pace, led by the strongest wage gain (0.5%) in three months. The saving rate fell back to 4.1%, as consumers continue to tap a deep reservoir to support spending.

Along with demand, inflation also warmed up this spring. PCE prices accelerated 0.4% across the board...headline, core, supercore (based on Haver's estimate). The respective yearly rates rose slightly to 4.4%, 4.7%, and 4.5%, while the 3-month annualized rates for the latter two metrics simmered down to 4.3% each, from close to 5% in March. Still, underlying inflation seems to be holding stubbornly high at above 4%.

Also running hot in April were durable goods orders, which surprisingly rose 1.1% after a larger gain the prior month, led by defense, aircraft and machinery. Core capital goods orders (ex-defense and aircraft) jumped 1.4%, more than erasing the prior month's decline and flagging some pickup in shipments and production ahead. However, 'control' shipments (nondefense capital goods, which feed into the BEA's business equipment tally for GDP) fell 1.8% after a larger gain the prior month.

Also coming in light was the U.S. goods trade deficit, which ballooned to $96.8 billion in April from $82.7 billion in March, due to a large slide in exports and a rise in imports.

Bottom Line: U.S. consumers are alive and well, while the economy likely continued to move forward in April and possibly for another quarter. All attention will turn to the next set of employment and CPI reports to judge whether the Fed can afford to pause on June 14, but today's report could well swing the pendulum back toward the hawkish contingent.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics

Table 2 - United States — Durable Goods Orders

(month/month % change : s.a.)

Source: BMO Economics, Haver Analytics