GDP Report Shows Solid Growth
Coming into the week of January 29th, the latest look at Gross Domestic Product (GDP) showed quite positive at an annualized rate of 3.3%— which is well above the consensus view of 2%.
The biggest component of growth was personal consumption, but all the major components were up. Looking ahead, spending on business inventories tends to fluctuate and given past increases we would expect it to be weaker in the future. However, personal consumption is more steady and growth in after inflation wealth becomes an important factor for future consumption and GDP growth.
Inflation Moderates But Services Remain High
In terms of inflation we also got some positive news with the Personal Consumption Expenditures (PCE) measure of inflation (the Fed’s preferred inflation gauge) continuing to decline on a year-over-year basis.
The main downsides in the PCE report is that both headline and core inflation saw a monthly increase. If we annualize the last 3 months, we have expected headline and core inflation of 0.4% and 1.6% respectively, which are within the Fed’s 2% target.
However, when we look at PCE components, inflation in services continues to run hot at 3.3%, well above target. We would like to see broader disinflation rather than just in goods.
Incomes Grow Providing Cushion
On a more positive note, the personal income numbers also showed growth in total and inflation-adjusted terms.
On a monthly basis, headline and real disposable income declined but remain positive on an annual basis at 4.2%.
If real income growth stays positive along with broad moderation in inflation, a soft landing is possible. However, if services inflation persists amid goods weakness, recession odds increase.
Housing Market Slows
In contrast to the previous week’s declines in existing home sales and housing starts, new home sales increased.
However, the median new home price fell to the lowest level in 12 months, signaling broader housing weakness.
Business Investment Uneven
Durable goods orders were essentially flat, and when excluding defense and transportation, still declined from recent months.
This fits the narrative of unwinding the pandemic goods boom in favor of services.
The data continues to tell the story that the big buildup in goods during the health crisis is being undone as we continue to emphasize services. The Fed’s messaging this week along with upcoming jobs data will provide important signals on whether the soft landing remains plausible.
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