Source: Economics Group of Wells Fargo Bank, N.A.
Summary
Real GDP grew at only a 1.6% annualized pace in Q1, held back by trade and inventories. Consumer spending in the service sector is not slowing, in fact, it is ramping up at a rate seldom seen in the past 20 years. That is problematic as core PCE prices are picking up again in defiance of higher rates.
Not the Droids You’re Looking For
It is tempting to see today’s miss in GDP as a welcome indication that curiously strong growth is at last giving way to the inevitable gravity of higher rates and thus the first bit of data needed to warrant eventual rate cuts by the Federal Reserve. Despite the fact that headline growth came in almost a full percentage point below expectations, we see little in today’s report that will warrant much legitimate justification for a softer monetary policy stance.
After an unsettling headline miss, the picture that emerges from the details in today’s GDP report is actually more of the same in terms of the factors that are standing in the way of a lower rate environment.
Consumers are still spending, they are just prioritizing activities in the service sector. Spending on non-durable goods stalled in the quarter while outlays on big-ticket durable goods items contracted at a 1.2% annualized rate. That was not nearly enough to offset the much larger services category, where consumers spared no expense in the first quarter. Like a relief pitcher in the late innings, services spending came in throwing heat in the first quarter with a blistering 4.0% annualized growth rate—the fastest surge in consumer services spending since the stimulus-fueled binge in 2021. Excluding 2020 & 2021, services has only come in above 4.0% three times in the last two decades (once in 2014 and twice in 2004). Higher rates are intended to cool consumer demand; the trouble for the Fed is: it’s not working.