The Bureau of Economic Analysis dropped the Personal Income and Outlays data this morning. This data set includes the Fed’s preferred measure of inflation, the chain-type Personal Consumption Expenditures.
The Fed likes to trim off categories that they deem volatile and they put together the Trimmed Mean PCE Inflation Rate.
Even this is pushing 30 year highs. The trimmed mean runs a couple months behind. The un-trimmed PCE has dropped from the recent peak of 6.6% to 6.3%. but the more important data was the consumer savings and disposable income.
The personal savings rate of American consumers continues to plummet. There are two things working against consumers at this point. The first is inflation, the rising costs of goods is eating away at the savings. Second, once consumers received the government covid handout money, their lifestyle costs increased. Trying to stay at that more expensive lifestyle has driven consumers to spend their savings. This is beginning to tap out consumers.
This is especially evident in the real disposable personal income. We are in totally uncharted waters here. We are over 20% down over last year’s figure. These two graphs show that the part of the spending growth in April was from savings. The other part was credit card use. It’s important to take a broad view of the income and savings of consumers. It had been inflated by the covid handouts and this effected the charts. The bottom line is, we are well below trend.
Consumers are beginning to lose their ability to weather this inflation storm. We are seeing this in the Michigan Consumer Sentiment reports which has continued to plummet.
Consumer sentiment is now down to 58.4. This was a downward revision from the preliminary reading of 59.1. Consumers are becoming pessimistic about buying houses and durable goods. Their views are also souring on the economy. This is a big headwind for the stock market.
The market sees this bad data and believes the Fed will pause their rate hikes sooner rather than later. This is dangerous thinking. The market has been warned by Powell many times. The latest was that he expects to raise rates above market expectations. This should have been a giant red flag to stock and bond holders, however this anecdote has been glossed over. Instead many are hanging upon the words of Atlanta Fed President Bostic who said, “it may make sense to pause in September”.
This has lead to the recent surge in the market. I am not getting sucked into this rally. I feel there are too many factors working against the economy and the market is overly optimistic. I’m taking the “wait and see” approach. I’m keeping my eyes on the bond market and the money supply. I’m not biting on this hook.