Are We Cooling Too Fast? Decoding the Latest Consumer Spending and Inflation Data

 

The economic headlines have been a rollercoaster lately, and the latest batch of data offers a nuanced, somewhat cautious picture. While the relentless climb of inflation seems to be slowing, there are increasing signs that consumer spending and income growth are also hitting the brakes. The big question on everyone's mind: Are we achieving a "soft landing," or are we cooling off a bit too quickly?

Let's break down the key takeaways from the recent percentage changes:

1. Inflation: Mission Accomplished? (Almost)

For months, the focus has been on taming inflation. The good news? It seems to be working.

• Core PCE Price Index (our best measure of underlying inflation, stripping out volatile food and energy) shows a monthly increase of 0.20%. This is a positive sign, tracking below the historical monthly average of 0.26%.

• Annually, core inflation now stands at 2.83%, a welcome dip below its historical average of 3.24%. This suggests that the broader price pressures in the economy are indeed moderating.

This is undoubtedly a win for households and businesses that have been grappling with higher costs.

2. Consumer Spending: The Speed Bumps are Appearing

While lower inflation is good, it comes alongside a noticeable slowdown in how much we're all spending.

• Overall Real Personal Consumption Expenditures (what we buy, adjusted for inflation) saw a meager 0.04% monthly increase. Compare this to the historical average of 0.18%, and you can see a clear slowdown. People are simply buying less, or at least, their purchasing power isn't growing as fast.

• The real alarm bell is in Real PCE: Durable Goods. These are your big-ticket items like cars, appliances, and electronics. This category actually contracted by -0.60% in the latest month. Historically, durable goods are a strong growth engine, averaging 4.72% annually. Currently, they're only growing at 2.07%. This sharp drop suggests that higher interest rates (making car loans and mortgages more expensive) and general economic uncertainty are making consumers pause on major purchases.

3. Real Income Growth: Running on Fumes?

The ability of consumers to spend ultimately comes down to their income. And here, the data presents another concern.

• Real Disposable Personal Income (what we have left after taxes and adjusted for inflation) grew by only 0.06% this month. This is significantly below the historical monthly average of 0.27%.

• Annually, real DPI is growing at 1.95%, which is well short of the 3.17% historical average.

When real incomes aren't growing robustly, it places a natural limit on how much consumer spending can drive economic expansion. People simply have less extra cash to fuel growth.

The Big Picture: A Delicate Balance

The overall message from this data is that the economy is indeed decelerating. Inflation is cooling, which is a positive development. However, this cooling is accompanied by weaker consumer spending, especially in durable goods, and subdued real income growth.

Policymakers will be watching closely. The goal is to bring inflation back to target without triggering a full-blown recession. The current trends suggest we're on a path to lower inflation, but the challenge now shifts to ensuring that the slowdown in consumer activity doesn't become too severe.

What are your thoughts? Are you seeing these trends in your own spending or business? Share your perspective in the comments below!

Consumer spending for major economies as of March 2023

Consumer spending is a key driver of economic growth, and it is important to track how it is performing in major economies. The data shows that consumer spending in most major economies declined in March 2023 compared to the previous month. The average decline across all economies was 6.23%.

There are a number of factors that could be contributing to the decline in consumer spending. One factor is rising inflation, which is making it more expensive for consumers to buy goods and services. Another factor is the ongoing war in Ukraine, which is causing uncertainty and volatility in the global economy.

Despite the decline in consumer spending, there are some positive signs. For example, in the United States, consumer spending rose by 0.93% in March 2023, which was better than expected. This suggests that the US economy is still growing, albeit at a slower pace than in previous months.

Overall, the data suggests that consumer spending is slowing down in major economies. This is a concern for policymakers, as it could lead to slower economic growth. However, there are some positive signs, such as the recent increase in US consumer spending. It remains to be seen whether consumer spending will continue to decline or whether it will start to rebound.

Source: https://tradingeconomics.com/country-list/consumer-spending?continent=g20