In one line: Revisions leave households’ spending looking less resilient.
- Q1 GDP growth was revised up to 2.1%, from 1.6%, above the consensus, 1.6%.
- Personal income rose 0.7% in May, above the consensus, 0.4%. Net revisions were zero.
- Real consumption rose 0.3%, above the consensus, 0.2%. But net revisions were -0.4pp.
- The core PCE deflator rose 0.3%, matching the consensus.
- Durable goods orders fell by 4.5% in May, but less than the consensus, -5.0%. Net revisions were +1.0%.
- Orders ex-transportation rose by 1.3%, above the consensus, 0.6%. Net revisions were +0.6%.
Consumers’ spending looks less resilient in the face of the energy price shock. The upward revision to Q1 GDP growth was almost entirely driven by the net trade drag being revised smaller. Growth in households’ spending in Q1 has been revised down to 0.5%, from 1.4%. Month-to-month growth in April also has been revised down to zero, from 0.1%. In that light, May’s 0.3% increase looks less impressive. We now think consumption likely increased by about 2% in Q2, down from our previous 2.5% estimate.
Even Q2’s modest growth in consumption looks unsustainable. The 0.3% rise in real aftertax incomes in May followed a 0.5% drop in April. The big picture is that incomes haven't risen over the last year, so households have entirely funded extra spending by saving less. The saving rate was 3.0% in May, unchanged from April but down by almost two percentage points from a year ago. The low saving rate partly is due to rapid gains in stock prices, which have persuaded asset-rich households to spend all they earn. But it also is a product of people spending the bigger-than-usual individual tax refunds they have received this year. Note that refund payments do not raise the BEA's measure of after-tax income this year, as it is calculated on an accruals basis. We think growth in consumption will relapse to a 0.5% pace in Q3, as support from the refunds fades.
For now, the industrial sector is still running hot; the slump in durable goods orders primarily was due to a prior surge in Boeing orders unwinding. Nondefense capital goods shipments ex-aircraft, which are a direct input into the business equipment investment numbers in the national accounts, rose 0.3% in May. In real terms, this core measure of capital goods shipments likely increased by about 6% in Q2, its fastest increase since Q1 2021. We provisionally estimate that total business equipment investment increased by around 8% in Q2, supported by growing purchases of imported tech goods. May's trade and inventories data, released tomorrow, will help us build a better picture of Q2. Nevertheless, the upturn in core capital goods orders has been driven by businesses placing orders early in case the closure of the Strait of Hormuz disrupts supply chains. We think this precautionary stockpiling will unwind soon, leading to a lurch down in orders in the second half of this year.
All told, then, today’s data look consistent with GDP growing at a 2.0-to-2.5% pace in Q3. A slowdown to about half that pace in the second half of this year looks likely as the support from tax refunds and precautionary stockpiling wears off.
