Consumers continue to spend, and what can the Fed do about it?
This will be debated by market analysts ad nauseum until the next Federal Reserve FOMC meeting in July. And then Chairman Powell, et. al., will probably follow former chair Paul Volcker’s lead; keep raising interest rate maybe another 0.50 percent by December and see then whether the US economy really hits the skids.
The Personal Consumption Expenditure Price Index (PCE) measure of inflation fell from 4.3 percent to 3.8 percent, but its core rate excluding food and energy remained higher (4.6 percent) because travel is soaring, keeping service prices from falling as much
Personal outlays (spending) barely moved, up 0.1 percent, while personal income rose 0.4 percent so the savings rate is rising (black line in graph).
Oh yes, we are getting ahead of ourselves because July 4 is coming up and the times are good for most American consumers because they still have lots of savings and nobody is losing their job that wants to keep it.
And after the final first quarter estimate of Gross Domestic Product (GDP) growth rose to 2.0 percent, economists are beginning to predict Q2 may grow as much. Consumer spending rose 4.2 percent from a prior 3.8 percent annual clip, explaining most of the upward increase in first quarter GDP. It was the biggest gain in two years.
And, the Atlanta Federal Reserve’s GDPNow second quarter estimate of blue-chip economists and its own data research took a sharp upturn.
It was largely revised upward to 2.2 percent on June 30, from 1.8 percent on June 27, because of upward revisions to second-quarter real personal consumption expenditures growth (just reported above) and second-quarter real gross private domestic investment growth.
The manufacturing sector keeps contracting, however. The Institute for Supply Management’s manufacturing survey dipped to 46 percent in June from 46.9 percent in the prior month. It was the lowest reading since May 2020.
This is why predictions of a looming recession are still being made. Manufacturing makes up just 11 percent of GDP activity, however.
That’s why consumers are still upbeat, The latest University of Michigan sentiment survey reflected their optimism:
“Consumer sentiment rose 9% this month, a consensus improvement across all demographic groups. The year-ahead economic outlook soared 28% over last month, and long-run expectations rose 11% as well. Overall, this striking upswing reflects a recovery in attitudes generated by the early-month resolution of the debt ceiling crisis, along with more positive feelings over softening inflation,” said survey director Joanne Hsu.
This Friday’s employment report for June will give more direction for Q2, so why are consumers still so upbeat. It looks like inflation doesn’t bother them as much as the Fed.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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