The first trimester GDP Report showed such deceleration and missed estimates by such a wide margin that stagflation fears are increasingly insinuating themselves into Wall Street discussions.
But the overall figure of 1.6% growth was weighed down by volatile factors such as a larger trade deficit and slower inventory replenishment, which masked strength in consumer demand, it said. Wells Fargo economists in a Thursday note titled “A wolf in sheep’s clothing: Low GDP hides rising spending.”
To be sure, consumers are spending less on goods, and the GDP report showed that spending on expensive durable goods contracted at an annualized rate of 1.2%, according to the note. But this was more than offset by an increase in spending on services.
“Like a late-inning relief pitcher, spending on services put the pressure on in the first quarter with a blistering 4.0% annualized growth rate – the fastest rise in spending on consumer services since the fueled frenzy by stimulus measures in 2021,” wrote economists Tim Quinlan. and Shannon Seery Grein.
Excluding 2020 and 2021, when pandemic lockdowns and reopenings skewed the data, growth in spending on services exceeded 4% only three times in the past two decades, they added. This happened once in 2014 and twice in 2004.
“Higher rates aim to cool consumer demand; the problem for the Fed is: it doesn’t work,” they said.
In fact, demand remains so strong in services that the 5.1% price rise in the sector exceeded the broader base rate of 3.7%, which was already a slight increase from the previous quarter.
At the same time, real disposable income grew more slowly in the quarter, but Americans continued to spend faster, pushing the personal savings rate to the lowest since late 2022, the note said. .
But data on the trade deficit and inventories overshadowed the more robust consumption figures. Excluding only the business impact, the first-quarter report would have been in line with forecasts, Wells Fargo said.
Another indicator of underlying domestic demand that excludes the trade deficit, inventories and government spending rose 3.1%.
“The last three quarterly results for this measure have all reached 3.0% or higher, signaling healthy and stable growth,” Wells Fargo concluded. “Don’t underestimate this saving.”
The bank’s note represents something of a counter-narrative to the grim reactions elsewhere.
EY chief economist Gregory Daco said Fortune earlier that the GDP report not only contradicted talk of a reacceleration of the economy without a landing, but it warned that there is further downside risk if inflation remains stubborn, eroding incomes and keeping financial conditions tight .
David Russell, global head of market strategy at TradeStation, also said Fortune that stagflation poses a growing threat. “If inflation does not improve with such weak growth, one has to wonder whether the downward price trend will continue.”
