A US Economic Snapshot at 2023’s Midway Point

America just celebrated its 247^th birthday, and what better way to commemorate the event than by analyzing some economic data?^[i] The latest numbers, including widely watched personal consumption expenditures (PCE), suggest growth continues to muddle along. Yet the reaction—and emergence of new concerns about US economy—indicate pessimism remains prevalent. In our view, that is a bullish combination, as stocks have plenty of wall of worry to climb entering 2023’s second half.

Per the Bureau of Economic Analysis, real (i.e., inflation-adjusted) PCE was flat month-over-month in May, a tad below estimates of 0.1% growth. On the prices front, the PCE price index decelerated to 3.8% y/y in May from April’s 4.3%, while core prices (which exclude food and energy) hit 4.6% y/y, down -0.1 percentage point from April. The headline deceleration met expectations while core prices slowed a bit (-0.1 percentage point) less than expected. Also last week, the Census Bureau announced durable goods orders—which aren’t adjusted for inflation—rose 1.7% m/m, well ahead of expectations of a -0.9% contraction. Nondefense capital goods orders excluding aircraft (commonly known as core capital goods orders) ticked up 0.7%.

The broad reaction to May’s figures was mixed: 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 a few commentators cheered the deceleration in prices (the PCE price index’s slowest year-over-year pace since April 2021), most raised questions about the Fed’s potential reaction since prices remain well above the bank’s 2% annual inflation target.

A deeper dive in the data reveals some interesting nuance, in our view. For example, services spending rose 0.2% m/m while 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 7/3/2023.

The May contraction in goods expenditures—and the -1.2% m/m dip in durable goods spending—seemingly contradicts growthy nominal durable goods orders. However, 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. 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).

Exhibit 2: PCE Goods Spending by Category

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

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. 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. Services prices ticked down from 5.5% y/y to 5.3%, in line with its range over the past 12 months. 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). But historically high inflation rates are cooling—a positive.

Exhibit 3: US Prices Continue to Slow

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

Admittedly, US economic conditions aren’t stellar, but that isn’t news to stocks, nor is it required. How the data relate to expectations matters far more. Today, many still expect recession to manifest at some point this year, including a majority of recently surveyed CFOs.^[ii] New fears also gain traction rather easily, as evidenced by the chatter that the resumption of student loan repayments is a huge economic risk. Against that pessimistic backdrop, a mixed reality that is proving more resilient than almost any forecaster thought likely at this time last year is bull market fuel, in our view. When fears dominate the narrative, it doesn’t take much for meager positives to boost moods—and stocks.