May 1, 2023
U.S. Consumer Strength - Flexport Weekly Economic Report
Though U.S. GDP slowed for the second consecutive quarter in Q1, less volatile measures of economic strength perked up in a way they had not for over a year. This shows resurgent consumer strength.
In Focus - GDP Signal and Noise
There are so many conflicting economic signals these days that it can be hard even to tell whether a major individual release shows strength or weakness.
The initial reading on U.S. GDP in Q1 demonstrates the point. The economy grew at a 1.1% seasonally-adjusted annual rate, the lowest figure since Q2 of 2022 and the second successive decline after the previous two quarters of 3.2% and 2.6% growth.
Yet, on balance, the report should be read as a sign of economic strength.
Why? The key is to try to extract clear signals from the noise. As the chart shows, GDP signals have been noisy – see, in particular, the stretch starting in Q2 2021 when growth went from 7.0% to 2.7% to 7.0% and then down to a 1.6% contraction, all in successive quarters.
The green line on the graph, without data labels, offers a less noisy version of the same broad trend. It captures real Final Sales to Private Domestic Purchasers. To see why this gives us a cleaner story, let’s pause to review the makeup of GDP, or C + I + G + X - M (exports minus imports).
With U.S. calendar 2022 values in trillions (and some rounding):
GDP ($25.5) =
- Consumption ($17.4)
- Private sector investment ($4.6)
- Government spending ($4.4)
- Exports ($3.0)
- Imports ($4.0)
Two important notes here. First, consumption is the driving force, accounting for 68.2% of GDP. If we break that down further, goods consumption accounts for 23.3% of overall GDP and services consumption 44.8%.
The second note is an obligatory reminder: imports do not actually detract from GDP! Even though the term enters with a negative sign, that’s just to avoid double-counting. Think of an American buying a European sedan: the transaction is entered in consumption, so it must also be subtracted in imports, lest it appear to be domestic output.
Now back to the story of how the U.S. economy has done recently. Real final sales to private domestic purchasers captures personal consumption plus gross private fixed investment (with the leading subcategories being business equipment and residential structures). Since the initial rebound from the Covid recession, it has been telling a fairly steady story of slowing growth, descending with a few minor blips from 2.1% in Q3 2021 down to 1.1% a year later and 0.0% in Q4 2022.
This quarter broke that trend. This smoother consumption measure was up 2.9%, its fastest growth since Q2 2021.
So why would GDP growth be decelerating while this consumption measure is accelerating? Smaller, volatile categories pulled the GDP number down. The most dramatic contributor was the slowdown in private, nonfarm inventory accumulation, which took 2.4 percentage points off the GDP measure. The inventory effect was only partially offset by government consumption (+0.8) and net exports (+0.1).
Extracting the signal from the noise, the story becomes a positive one: the core consumption engine of the U.S. economy showed strength in Q1 that we hadn’t seen in a year and a half.
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The 12-month trimmed-mean PCE inflation rate was 4.7% in March, unchanged after an upward revision of 0.1 percentage point to the February reading. The core 12-month PCE deflator, which strips out volatile food and energy prices, was also down 0.1 percentage points to 4.6%, still mostly unmoved. Both trimmed-mean and core PCE inflation numbers are trying to extract underlying inflation trends from a noisier set of numbers.
Real U.S. personal consumption expenditure (PCE) decreased by less than 0.1% month-on-month in March but was still 1.9% above spending a year prior. The month-on-month decline was driven by 0.4% drop in durable goods; spending on services rose by 0.1%. This was largely in-line with Flexport’s forecasts.
The April Michigan Consumer Sentiment Index ticked up from March, rising by almost two index points to 63.5, but remained well below pre-pandemic levels. Confidence in financial institutions, a periodic inclusion in the broader survey underpinning the index, fell across the board, with the largest drop in confidence in commercial banks. The survey was fielded after the failures of Silicon Valley Bank and Signature Bank.
Seasonally-adjusted Euro area GDP increased 1.3% year-on-year in the first quarter, according to last week’s flash estimate. It was up a mere 0.1% quarter-on-quarter. Year-on-year, Spain (3.8%), Ireland (2.6%) and Portugal (2.5%) saw the largest gains, while Germany was down 0.1%.
Euro area economic sentiment in April rose 0.1 point from March to 99.3, the third straight month of little or no change to the indicator. Continuing improvement in sentiment in the services sector (+10.5) was offset by another steep decline in the consumer sector (-17.5).
Last week’s major trade data releases were mixed:
The latest World Trade Monitor, covering global merchandise trade for February, showed seasonally-adjusted volumes falling 0.9% month-on-month after a slight increase of 0.3% in January. ‘World Trade Momentum,’ an average of the current three month period over the previous three-month period, was again negative at -2.2% but an improvement over the January reading of -2.7%.
Preliminary April exports for South Korea, the first major exporter to release figures for the previous month, showed a 14.2% year-on-year decline, driven largely by a fall in semiconductor exports. It was the seventh straight month exports fell; they are down 13.0% year-to-date.
Mexico’s exports rose by 4.5% on a seasonally-adjusted basis to $49.4 billion in March. Unadjusted nominal exports hit a new monthly high of $53.6 billion, with non-oil exports to the U.S. – by far Mexico’s largest export market – increasing by 6.2% (see related Flexport research). Imports of capital goods were up 21.9% year-on-year.
The Bank of Japan left its benchmark short-term interest at -0.1% in the first policy meeting under new governor Ueda Kazuo. The announcement, however, removed reference to “keeping rates at current or lower levels,” a signal of potential tightening in the months ahead. To wit: Japan’s inflation numbers for March were also released last week, showing that core CPI, which excludes fresh food, remained unchanged from February at 3.1%. It has been above the BoJ’s target of 2% for the past eleven months.
U.S. National Security Adviser Jake Sullivan outlined the Biden administration’s international economic policy in a speech on April 27th, arguing that the ‘gains from trade failed to reach a lot of working people.’ In broad terms, Sullivan described an industrial strategy that will increase public investment in strategic sectors, as well as a trade policy aimed at securing supply chains for critical minerals and strategic goods and services.
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