Takeaways from the April 2023 Personal Income and Outlays report
WHAT HAPPENED
Real disposable household income (income adjusted for inflation) flat-lined in April, but real consumer spending jumped. That led to a decline in the savings rate as households ate into reserves to finance purchasing, raising the question: for how much longer?
A couple more details:
Gains in inflation-adjusted spending were broad-based, with new spending on new automobiles climbing by double-digits.
The savings rate dipped to 4.1%, which is still well below the 7.6% average rate experienced during the second half of the last recovery (2015-2019).
The monthly pace of core PCE inflation – the Fed’s target measure – rose at the rapid pace of 0.4%. It continues to grow at the fastest pace since the late 1980s.
WHAT'S NEXT
Households are expected to pull back on spending later this year, which means that avoiding a default likely won’t be enough to keep the economy from dipping into a mild recession in 2023.
Inflation isn’t coming back down to the Fed’s target in 2023. The April data showed an acceleration in the monthly pace of core PCE growth, all but ensuring another quarter-point rate hike in June. History is clear that inflation doesn’t cool quickly, even during a recession.
A recession is still likely in the second half of 2023. Households will continue to lean on savings to offset high borrowing costs and elevated inflation. Persistently strong wage growth helps, but the reserve of excess savings amassed during the pandemic will run dry by yearend. Don’t expect the Fed to ease unless there is a full-blown crisis, which means once spending cools or contracts, it’s unlikely to rebound until inflation decelerates to target, allowing the Fed to ease off the brakes in 2024.
Tim Mahedy is the Founder and Chief Economist of Access/Macro – a consultancy focused on uncomplicating the economy so that your business can make better decisions.
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