A US Economic Snapshot at 2023’s Midpoint

Halfway through the year, how is the world’s largest economy faring? ^[i] The latest numbers, including widely watched personal consumption expenditures (PCE), suggest growth continues to muddle along. Yet the reaction in financial publications we follow, which includes the emergence of new concerns about US economy, indicates to us that pessimism remains prevalent. In our view, that is a bullish combination, suggesting stocks have plenty of the proverbial wall of worry bull markets (extended periods of generally rising equity prices) climb entering 2023’s second half.

Per America’s Bureau of Economic Analysis, real (i.e., inflation-adjusted) PCE—the country’s broadest measure of consumer spending—was flat month-over-month in May, a tad below economists consensus expectations for 0.1% growth.^[ii] On inflation—broadly rising prices across the economy—the PCE price index decelerated to 3.8% y/y in May from April’s 4.3%, whilst core prices (which exclude food and energy) hit 4.6% y/y, down -0.1 percentage point from April.^[iii] The headline deceleration met expectations whilst core prices slowed a bit (-0.1 percentage point) less than expected.^[iv] Also last week, the Census Bureau announced manufacturers’ orders for durable goods (meaning goods designed to last three years or more)—which aren’t adjusted for inflation—rose 1.7% m/m, well ahead of expectations of a -0.9% contraction.^[v] Nondefense capital goods orders excluding aircraft (commonly known as core capital goods orders) ticked up 0.7%.^[vi]

Based on financial commentators we follow, the broad reaction to May’s figures was mixed. We saw some optimism about the stronger-than-expected core capital goods orders—which many economists treat as a proxy for business investment—along with concerns of lost momentum in consumer spending. Similarly, though we noticed a few commentators cheer the deceleration in prices (the PCE price index’s slowest year-over-year pace since April 2021), we also read many concerns about how American monetary policy officials may act on the news since prices remain well above their 2% annual inflation target.^[vii]

A deeper dive in the data reveals some interesting nuance worth weighing against the consensus reaction, in our view. For example, services spending rose 0.2% m/m whilst goods spending contracted -0.4%, extending a longer-running trend of growth in the former and volatility in the latter.

Exhibit 1: Services vs. Goods Spending Over the Past Two Years

Source: FactSet, as of 3/7/2023.

The May contraction in goods expenditures—and the -1.2% m/m dip in the durable goods spending subcategory—seemingly contradicts rising nominal (i.e., not adjusted for inflation) durable goods orders. However, we think a look under the hood suggests one noisy subset is impacting the broader category: autos (-4.3% m/m in May). As we have discussed before, automobile output and spending have been volatile over the past several years, tied largely to COVID lockdowns. Consider, outside this area, nondurable goods spending has generally been more stable. (Exhibit 2) In our view, that suggests autos’ volatility is skewing the broader goods picture. Our research has found supply disruptions are a big issue there, so we think it is encouraging that the Census Bureau’s May advance report shows transportation equipment shipments rose 4.6% m/m—and motor vehicles shipments specifically were up 2.4% (its third-straight positive month).^[viii]

Exhibit 2: PCE Goods Spending by Category

Source: FactSet, as of 3/7/2023.

As for PCE inflation, an across-the-board slowdown continued in May. Goods prices decelerated to 1.1% y/y from April’s 2.1%, as both durable goods and nondurable goods prices slowed.^[ix] Note, too, motor vehicles & parts prices rose 2.3% y/y, repeating April’s rate—a far cry from last year’s double-digit rates—and another sign supply pressures impacting autos are easing, in our view.^[x] Services prices slowed from 5.5% y/y to 5.3%, in line with its range over the past 12 months.^[xi] Now, though price growth is slowing, that doesn’t translate into falling prices—so households and businesses must still contend with above-average inflation rates (when compared to pre-pandemic years).^[xii] However, America’s historically high inflation rates are cooling—a positive, in our view.

Exhibit 3: US Prices Continue to Slow

Source: FactSet, as of 3/7/2023.

Admittedly, US economic conditions aren’t stellar, but that isn’t news to forward-looking stocks, nor is it required—according to our research, how the data relate to expectations matters far more. Today, many experts we follow still forecast recession (a period of contracting economic output) at some point this year, including a majority of over 100 recently surveyed chief financial officers at US corporations .^[xiii] We have also seen new alleged negatives gain traction rather easily, as evidenced by concerns that US student loan repayments—which are set to resume by October after a pause mandated by 2020 US legislation providing pandemic relief—are a huge economic risk.^[xiv] Against that pessimistic backdrop, a mixed reality that is proving more resilient than almost any forecaster we follow deemed likely at this time last year is bull market fuel, in our view. When fears dominate the narrative, we have found it doesn’t take much for meagre positives to boost moods—and stocks.