Headline PCE for April rose .4% m/o/m as did the core rate and both were one tenth above expectations. The y/o/y gains were 4.4% and 4.7% respectively, up from 4.2% and 4.6% in the month prior. Goods prices were up 2.1% y/o/y and seems to have bottomed out and service prices grew by 5.5% y/o/y and likely has topped out as rent growth recedes from here.
Bottom line, because PCE comes out weeks after CPI there is typically less drama and thus rarely deviates much from expectations. Even though the numbers came in a bit above estimates, I don’t believe any Fed member should be making their June meeting decision solely on the basis of a one tenth upside of a backward looking figure. Yes, inflation is persistent, though at a slowing pace and the rental growth slowdown is not yet reflected. There must be some appreciation that since SVB failed, between the Fed and credit conditions, we’ve seen an additional 100 bps of rate increase equivalents (give or take). Isn’t it just prudent to see how things play out in the coming months? Isn’t there another FOMC meeting in July and usually every 6 weeks thereafter?
Headline PCE y/o/y
Personal income growth of .4% m/o/m was as forecasted. Specifically private sector wages and salaries grew by .5% m/o/m and 5.6% y/o/y (vs 5.3% in the month prior and 5.6% in the month before that). Spending was up .8%, 3 tenths more than estimated with a rebound in spending on both durable and non-durable goods. Spending on services continues on. Combining the two saw the savings rate fall to 4.1% from 4.5% and for perspective, this has averaged 6% in the 20 years leading into Covid. We might see a slight raise in Q2 GDP estimates on that upside in spending. We’ve heard so much information from many retailers over the past few weeks that tells us all we need to know about the state of consumer spending.
Core durable goods orders in April were much better than anticipated with a 1.4% m/o/m jump vs the estimate of no change but comes after a .6% drop in March and .2% fall in February. The internals though driving the gain was pretty mixed. Orders for vehicles/parts fell for a 2nd month and hasn’t grown since January. All those chip orders for AI hasn’t yet showed up as orders for computers/electronics and electrical equipment both declined m/o/m. Machinery orders were the only upside, gaining 1% but after drops in 4 of the previous 5 months. Metals orders were mixed.
Shipments of core goods were about as expected when we include the March downward revision so there shouldn’t be any GDP change on this.
Bottom line, while that core figure saw nice upside, the breadth of gain was pretty limited and I’ll say again, a company needs growing cash flow in order to finance growth in capital spending and for many companies, the trajectory of earnings and cash flow is now down.