May 30, 2023
The Mighty U.S. Consumer - Flexport Weekly Economic Report
Real personal consumption expenditures in April showed their strongest monthly increase since January. U.S. consumers’ enduring dedication to spending has been most pronounced (and least explicable) in the case of durable goods.
In Focus - Resurgent PCE
Over the last year, interest rates have risen, the Federal Reserve has started to sell off its bond holdings, and fiscal policy has been devoid of the dramatic disbursements that marked the early part of the pandemic. What has all this done to the American consumer? Remarkably little.
After two relatively flat months, real personal consumption expenditures jumped 0.5% in April. Breaking down the components of this jump, goods (up 0.8%) outdid services (up 0.3%). Within goods, durables – those goods meant to last three years or more – were up 1.4% vs. 0.4% for nondurables.
The elevated preference for goods over services has been one of the most distinctive economic features of the pandemic era. Before, the ratio of goods to services consumption stayed relatively constant (with just over 2/3 of consumption in services). The chart normalizes each category to where it was in February 2020 and allows for easy measurement of percentage changes onwards.
Who could have foreseen that the preference for goods would remain so high more than three years on from the pandemic’s onset?
Well, actually, Flexport Research has been tracking and forecasting this reasonably accurately with the Flexport Post-Covid Indicators, which call for more of the same in the months to come.
There is a difference between prediction and explanation, however. The data released last week compounded the single most inexplicable consumption puzzle: How can the demand for durable goods remain as strong and persistent as it has? In April 2023, durable goods consumption was up 28.9% from its level in February 2020. Astoundingly, that’s roughly the same percentage increase as from October 2007 to February 2020.
There have been shifts within the durable goods category (see the Flexport Consumption Forecast for details); in April, new motor vehicles led the way. But it is still remarkable that demand for these lasting goods has not been sated and shows a compensatory dip.
Across both broad goods categories, there was a pattern of sharp spikes in the early months of the pandemic, followed by some settling after a year. This month’s numbers, though, look more like another upturn rather than a settling. The latest durable goods reading is the highest since April 2021; nondurables is the highest since January 2022. Services consumption, in contrast, continues its slow steady climb.
None of this will reassure central bankers looking for the economy to cool down. Curiously, though, the PCE inflation numbers found in the same report show that goods prices over the last year have increased at a modest 2.1% rate, while services prices held steady at 5.5%.
A final point to consider is how - or if, really - the U.S. consumer can afford this buying spree. The dashed line shows real disposable personal income. It spiked with early-pandemic fiscal infusions, then abated. At least initially, a large fraction of income was saved, with peak savings rates of 33.8% in April 2020 and 26.3% in March 2021. While those rates have dropped significantly – 4.1% in April 2023 alone - the level of disposable personal income was still the highest since October 2021.
While retail sales have been weak in some sectors, there are no broad signs of a slowdown in personal consumption. At least not yet.
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This week, we published a piece discussing the IPEF supply chain agreement.
Q1 U.S. GDP was revised upward by 0.2% to an annualized rate of 1.3%, mainly due to higher private investment in inventories. That still represented a slowdown in quarter-on-quarter growth, although consumer spending and exports increased at seasonally-adjusted annualized rates of 3.8% and 5.2%, respectively.
The U.S. 12-month trimmed-mean PCE inflation rate was 4.8% in April, a rise of 0.1% percentage point from March. The core 12-month PCE deflator, which strips out volatile food and energy prices, was also up 0.1 percentage point to 4.7%. Both trimmed-mean and core PCE inflation numbers are trying to extract underlying inflation trends from a noisier set of numbers. They are particularly important in Fed decision-making.
U.S. consumer sentiment soured in May by one leading measure, with consumers’ economic outlook for the next year falling 17% month-on-month and longer-run expectations down 13%. Accompanying analysis points to a similar drop during the 2011 debt ceiling crisis, although now – as then – the crisis appears to have been averted (see below).
Advanced wholesale inventories in the U.S. were 0.2% lower in April than March and retail inventories 0.2% higher. Year-on-year, wholesale inventories were still up 6.2% while retail inventories were 7.7% above 2022 levels. Figures are adjusted for seasonality and trading day differences, but not for inflation.
Germany’s Q1 GDP was revised downward to -0.3% from the advance estimate of zero growth and Q4 2022 GDP was revised to -0.5%, indicating the country was in a technical recession, defined as two consecutive quarters of contraction.
UK headline inflation registered 7.8% in April, a fall from the 8.9% reading in March, while core inflation, which also excludes energy, food, alcohol and tobacco, rose to 6.8% from 6.2% a month earlier. As in other developed economies, the UK CPI for goods has been easing, while the services CPI is on the rise, increasing 0.3 percentage points to 6.9%.
The main trade data releases last week showed one sign of improvement, albeit a lagged one, while more current data showed signs of weakening.
World merchandise trade rebounded in March, increasing 1.5% month-on-month after a 0.8% drop in February. Momentum in world trade, a measure of the current three-month period over the previous three months, remained negative at -0.9% but improved from the -2.4% reading from February. The improvement was attributed to a post-holiday jump of 19.9% in China’s exports.
Mexico’s April exports of manufactured goods fell 14.5% – or $6.9 billion – from the previous month but were only down 0.4% from the same period last year. Half of the monthly drop was in auto exports, which decreased by $3.5 billion following a significant surge in March. Overall exports to the U.S. rose by 0.3%.
Taiwan’s April export orders were down 18.1% year-on-year to US $42.5 billion. ICT products, which includes semiconductors, were only off 0.9% by the same measure, although they were 10.9% lower than the January - April period last year.
The White House and House Republican leadership reached a deal over the weekend to raise the debt ceiling before June 5th, the day the U.S. Treasury projected it would run short of funds to fulfill all payment obligations. Named the “Fiscal Responsibility Act of 2023,” the agreement suspends the cap on government debt for two years in exchange for limits on discretionary spending, among smaller spending cuts and other compromises. Congressional leaders on both sides believe there is enough support for the bill to pass, although hurdles remain before the proposed vote on Wednesday.
U.S. Trade Representative Katherine Tai met with her Chinese counterpart, Commerce Minister Wang Wentao, in Detroit last week for discussions on the U.S. - China commercial relationship. The meeting, held on the sidelines of the APEC Ministerial, came the day after Minister Wang met with U.S. Commerce Secretary Gina Raimondo in Washington and a week on from China’s ban on the use of Micron Technology’s semiconductors by the country’s critical infrastructure operators.
Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.