U.S. GDP increased +2.8% quarter-over-quarter, which was ahead of Q1 2024’s rate (+1.4%). The upturn was driven by an inventory build and an acceleration in consumer spending. On a year-over-year basis in nominal terms, Q2 2024 GDP growth of +5.8% was marginally above Q1’s +5.4% rate; the acceleration was seen in clothing & footwear, software (+8.1%), and residential investment (+9.0%).
Readers will know that one of our big themes of 2024 is that spending on goods ("stuff") will be in more balance with experiences ("fun"). We saw more evidence of that this week with the earnings reports from the airlines. The industry added way too many routes and seats for this summer, thinking it would be another ebullient season and surpassing last year by a large margin. They were wrong, both domestically and in Europe. The Financial Times had a full story on the mismatch between supply and demand titled, Airlines Brace for End of ‘Revenge Travel’ Boom: Ticket Price Falls Driven by Surplus Capacity Raise Fears the Industry’s Post-Pandemic Surge is Over. With less demand for flights, hotels, restaurants, and other "fun", the pressure on labor costs will ease, which has ripple-on effects to retail and all other labor-intensive industries.
When we pair up the above paragraph with our commentary of late of prices rolling over along with the GDP’s print for PCE-core of +2.6%, we see supporting evidence for our view that Fed Chair Jerome Powell is likely to declare that the Fed has a high level of confidence the inflation is headed towards the 2% target at the end of next month, thus allowing the Fed to ease its monetary tightening at the September 18 meeting. As it relates to the remainder of the year, he is likely to say “the Fed will remain highly attentive to the incoming data so that the Fed can manage both sides of its mandate of achieving full employment and price stability.” Inflation headed to 2%, real GDP increasing 2.5%+ year-over-year, and a still strong labor market is the “Goldilocks scenario.”
June's Personal Income and Personal Consumption Expenditure (PCE) report was also released this week. Personal income increased by $50B month-over-month (a seasonally adjusted annual number) which nearly matched the $59B increase in PCE, leaving the savings rate little changed. The price index for PCE was an improved +2.5% (-10 basis points month-over-month) with durable goods deflationary (-3.2%), packaged grocery items trending flat, but insurance (+5.9%), housing (+5.5%) and food services (+3.7%) still problematic.
Back to 2024 being in better balance, which will make for a more favorable environment for retailers, which was the case for fiscal Q1 earnings. The table below shows are preferred way of looking at the "stuff" versus "fun" dynamic; it shows is that overall PCE increased by +$798B in 2023. YTD PCE is up +$430B, or at a slightly lower pace than last year. May was +$84B month-over-month and June up $58B month-over-month. Spending on "stuff" was higher by +$26B in June versus the +$10B increase on "fun". The ratio of fun-to-stuff is now at a 0.4x ratio versus last year’s 3.5x. The ratio of other-to-stuff is down to 0.8x versus 25.6x last year. This is what we mean by better balance. We see no evidence that the balance is shifting away from our outlook, and as such, we expect a good set of earnings (in general, but inclusive of our caveats) for the summer and fall.
