The first quarter GDP report showed so much lag and missed estimates by so much that Stagflation fears are increasingly creeping into the conversation on Wall Street.
However, the overall 1.6% growth was weighed down by volatile factors such as a wider trade deficit and slower inventory replenishment, masking how resilient consumer demand continued to be, he said Wells Fargo Economists in a note Thursday titled “Wolf in Sheep’s Clothing: Weak GDP Masks Rising Spending.”
Of course, consumers are spending less on goods, and the GDP report showed spending on expensive durable goods fell 1.2% on an annual basis, the note said. However, this was more than offset by an increase in spending on services.
“Like a relief pitcher in the closing stages, services spending surged in the first quarter at a blistering 4.0% annual growth rate — the strongest increase in consumer services spending since the economic surge in 2021,” economists Tim Quinlan and Shannon Seery Grein wrote.
Apart from 2020 and 2021, when the data was distorted by the pandemic lockdown and reopening, service spending growth has exceeded 4 percent only three times in the last two decades, they added. This happened once in 2014 and twice in 2004.
“Higher interest rates are expected to dampen consumer demand; The problem for the Fed is: It doesn’t work,” they said.
In fact, demand in the services sector remains so strong that the sector’s price increase of 5.1% exceeded the broader core price increase of 3.7%, which was already a quarter-on-quarter increase.
Meanwhile, real disposable incomes posted slower growth in the quarter, but Americans continued to spend faster, pushing the personal savings rate to its lowest level since late 2022, the note said.
But trade deficit and inventory data masked more robust consumer numbers. Excluding the trade impact alone, the first-quarter report would have been in line with forecasts, Wells Fargo said.
Another measure of underlying domestic demand that excludes the trade gap: inventories and government spending rose 3.1%.
“The last three quarterly numbers for this metric were all at 3.0% or higher, signaling healthy and stable growth,” Wells Fargo concluded. “Don’t underestimate this economy.”
In a sense, the banknote represents a counter-narrative to the bleak reactions elsewhere.
EY Chief Economist Gregory Daco told Assets earlier that the GDP report not only undermines talk of a reaccelerating “no-landing” economy, but it also warned that there was further downside risk if inflation remained stubborn, incomes eroded and financial conditions remained tight .
David Russell, global head of market strategy at TradeStation, also said Assets that stagflation is a growing threat. “If inflation doesn’t improve with such weak growth, one has to wonder whether the trend towards lower prices will continue.”