Is It Different This Time?

This morning’s we saw April personal spending read come in weaker than expected – down -0.1% vs. expectations of a +0.1% gain, with the read for the previous month revised modestly higher. Notwithstanding the apparent loss of momentum that today’s growth number has shown, personal spending growth remains fairly strong when looked at on a year-over-year basis and after adjusting it for inflation (the ‘headline’ personal spending number is on a nominal or non-inflation-adjusted basis).

Personal spending is a big deal, as it accounts for more than two-thirds of the U.S. economy. We saw in the revision to the Q1 GDP report on Thursday that personal spending (called personal consumption expenditures, or PCE, in the GDP accounts) growth was revised higher to +3.1% compared to the +3.4% growth in 2013 Q4. This didn’t make much sense, as most retailers like Wal-Mart (WMT), Target (TGT) and others had reported lousy numbers for Q1 and complained endlessly about how the rough winter had weighed on their business.

[Read: Ryan Puplava CMT: Why the Market Ignored Bad GDP Numbers]

The positive revision to Q1 PCE wasn’t enough to stop the GDP growth rate from falling into negative territory. But more importantly, most of the PCE growth in Q1 was driven by increased demand for “services” like healthcare and home heating. Households spent at a ramped-up pace of +4.3% in Q1, which came largely at the expense of other key consumption categories (see: retailers’ lousy Q1 numbers).

Today’s spending miss notwithstanding, most recent data has been indicating that we are on track for a solid rebound on this front in the current period. Some of the more aggressively optimistic estimates peg Q2 GDP growth at +4% or higher, but even consensus estimates are looking for growth in excess of +3%, with the growth momentum accelerating in the second half of the year and beyond.

[Video: Quarterly Webinar 2014 Q1: Valuations, Economics and Interest Rates]

The stock market’s march into record territory reflects this favorable consensus narrative of the U.S. economic outlook. But the bond market appears unwilling to buy into this positive narrative, resulting in a divergence between the stock and bond markets. Hard to tell which asset class has a better grasp of ground realities, but bonds have historically had a better track record. Maybe ‘“it’s different this time” — we will find out in the coming months.

About the Author