The first-quarter GDP report showed such a strong slowdown and such wide deviations from estimates that fears of stagflation are increasingly permeating conversations on Wall Street.
But the overall 1.6% growth rate was weighed down by volatile factors such as a widening trade deficit and slower inventory replenishment that masked how resilient consumer demand remains, Wells Fargo economists said Thursday in a note titled “A Wolf in Sheep’s Clothing: Soft GDP masks rising costs.”
Of course, consumers are spending less on goods, and the GDP report showed spending on big-ticket durable goods fell 1.2% year over year, the note said. But this was more than offset by rising service costs.
“As a late-bowler, services spending surged in the first quarter at a blistering 4.0% annualized rate—the fastest growth in consumer services spending since the stimulus-fueled binge of 2021,” the economists wrote. Tim Quinlan. and Shannon Seery Grain.
With the exception of 2020 and 2021, when pandemic lockdowns and reopenings skewed the data, service spending growth has only exceeded 4% three times over the past two decades, they added. This happened once in 2014 and twice in 2004.
“Higher rates are intended to cool consumer demand; The problem with the Fed is that it doesn’t work,” they said.
In fact, demand for services remains so strong that the sector’s 5.1% price rise outpaced the broader benchmark rate of 3.7%, which was already an increase from the previous quarter.
Meanwhile, real disposable income grew more slowly this quarter, but Americans continued to spend faster, pushing the personal savings rate to its lowest level since late 2022, the note said.
But data on the trade deficit and inventories overshadowed more reliable consumption data. Excluding just the trading impact would have brought the first-quarter report in line with forecasts, Wells Fargo said.
Another measure of core domestic demand that excludes the trade deficit, inventories and government spending rose 3.1%.
“The last three quarterly rates of this metric have been 3.0% or higher, indicating healthy and stable growth,” Wells Fargo concluded. “Don’t underestimate this economy.”
The bank’s note provides a counternarrative to the grim reactions of other countries.
EY Chief Economist Gregory Daco spoke about this. Luck earlier that the GDP report not only refuted talk of a “no-landing” economic revival, but he warned there was further downside risk if inflation remained persistent, eroding earnings and keeping financial conditions tight.
David Russell, head of market strategy at TradeStation, also spoke Luck stagflation is a growing threat. “If inflation doesn’t improve with such weak growth, you have to wonder whether the downward trend in prices will continue.”