Strong Data Could Mean We’re Not Out of the Woods with Rate Hikes

Source: Economics Group of Wells Fargo Bank, N.A. Summary Consumer spending, core capital goods orders and inflation all picked up speed in April, making the Fed’s task of getting inflation under control more difficult. While we recently pared our expected decline in consumer spending, there is still trouble ahead especially, if the labor market loses steam. Economic Resilience on Full Display in April Today’s durable goods and personal income & spending reports share a common theme of staying power. The consumer continues to deliver in a way that exceeds consensus expectations and defies predictions of a coming demise. While a simple trend extension makes a compelling case for the consumer to keep on rolling and allow the economy to achieve a soft landing, our analysis still suggests the fundamentals are deteriorating (more on that below). But there is no denying that the pace of spending revealed in today’s data was stronger than expected, and the same can be said about robust core capital goods orders which may be benefiting to a degree from the sustained outlays on consumer goods. Taken together, the signal from today’s data to policymakers at the Federal Reserve is that the fastest pace of rate hikes since the early 1980s has yet to sufficiently slow the economy to cool inflation. While our base case remains the FOMC holds the fed funds rate steady in June, the strong slate of data, with additional key readings on employment and inflation for May still to come, keeps the possibility of at least one more hike this cycle in play. Even after adjusting for the biggest monthly increase in PCE inflation since January, real consumer spending rose 0.5% in April which ties the second biggest monthly gain of the past year. But critically, income growth was only sufficient to match inflation: the nominal gain of 0.4% in personal income translates to a goose-egg (0.04% before rounding) after backing out the 0.4% increase in prices. This threatens to end what is now technically a 10-month run in which income outpaced inflation, but it is increasingly evident real income is losing a bit of momentum. It is not surprising then to see consumers tap the rainy day fund again as the saving rate fell for the first time in six months. READ FULL ARTICLE >>