Last week brought several key economic data releases, with the PCE price index, the Fed’s preferred inflation measure, being one of the most notable. The headline PCE inflation rate held steady for the month, with the 12-month rate now at 3.01%. However, excluding volatile food and energy prices, core PCE inflation was still 0.2% over the month, leaving the annual core inflation rate at 3.46%.
Also, when we look at the components of inflation, we see that services remains stubbornly high at almost twice the Fed’s 2% target, while only durable goods is experiencing true deflation.
If we annualize the past three months of headline PCE readings, inflation would register around 3.2% over the next year. While headed in the right direction, we likely need to see a moderation of services inflation before declaring clear progress toward the Fed’s goal of 2%.
Personal income and spending data released also provide a mixed picture. Personal income increased a modest 0.25% for the month, but real (inflation-adjusted) disposable income notched a slightly larger 0.26% gain—which is an uptick from recent months.
Meanwhile, personal spending dipped to a still positive rate of 0.22% for the month, potentially the beginning of some demand pullback by consumers.
On a positive note, economy-wide corporate profits rose to $3.28 trillion, nearing the record high from one year ago at 3.299 trillion, rebounding from the declines of recent quarters.
Manufacturing activity remains a clear weak spot – the ISM manufacturing index was flat at 46.7 (any reading below 50 is a contraction), with the sector now experiencing 13 straight months of contraction.
And while new home sales declined from some of last month’s gains, the median sales price retreated as supply increased to 7.8 months – indicating some welcome cooling on the housing front.
In total, the state of inflation coupled with income and manufacturing signals point to a gradual economic deceleration underway. The “goods” side of the economy is seeing weakness with contraction in production and either disinflation or deflation; while the “services” side of the economy continues to show strength.
As we have stated in the past, a true soft landing will be one where inflation declines towards the Fed’s goal of 2%, while real income continues to show some growth—otherwise we are just getting stagflation lite. However, it seems unlikely that we can achieve a decline in the inflation rate without services also coming down, which likely means a recession. The path to a soft landing never guaranteed, but recent data keeps the door open.
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