Friday, May 30, 2014
Stocks appear on track to open modestly on the weak side on this last day of May after clocking in solid gains in recent days and reaching record levels. Today’s data flow has been on the weak side thus far, with Personal Income & Outlays coming short of expectations.
This morning’s April personal spending read came in weaker than expected – down -0.1% vs. expectations of a +0.1% gain, with the read for the previous month revised modestly higher. Notwithstanding the apparent loss of momentum that today’s growth number represents, personal spending growth remains fairly strong when looked at on a year-over-year basis and after adjusting it for inflation (the ‘headline’ personal spending number is on a nominal or non-inflation-adjusted basis).
Personal spending is a big deal, as it accounts for more than two-thirds of the U.S. economy. We saw in the revision to the Q1 GDP report on Thursday that personal spending (called personal consumption expenditures, or PCE, in the GDP accounts) growth was revised higher to +3.1% compared to the +3.4% growth in 2013 Q4. This didn’t make much sense, as most retailers like Wal-Mart (WMT), Target (TGT) and others had reported lousy numbers for Q1 and complained endlessly about how the rough winter had weighed on their business.
The positive revision to Q1 PCE wasn’t enough to stop the GDP growth rate from falling into negative territory. But more importantly, most of the PCE growth in Q1 was driven by increased demand for “services” like healthcare and home heating. Households spent at a ramped-up pace of +4.3% in Q1, which came largely at the expense of other key consumption categories (see: retailers’ lousy Q1 numbers).
Today’s spending miss notwithstanding, most recent data has been indicating that we are on track for a solid rebound on this front in the current period. Some of the more aggressively optimistic estimates peg Q2 GDP growth at +4% or higher, but even consensus estimates are looking for growth in excess of +3%, with the growth momentum accelerating in the second half of the year and beyond.
The stock market’s march into record territory reflects this favorable consensus narrative of the U.S. economic outlook. But the bond market appears unwilling to buy into this positive narrative, resulting in a divergence between the stock and bond markets. Hard to tell which asset class has a better grasp of ground realities, but bonds have historically had a better track record. Maybe ‘“it’s different this time” — we will find out in the coming months.
Director of Research
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