Oh Consumer, Where Art Thou?

09/29/17 10:55AM EDT

Key Takeaway: Despite the conspicuous waning of household consumption momentum, the U.S. economy remains in #Quad1 for 3Q17E. That said, however, it’s critically important for consumer spending to snapback in OCT to justify the market(s) looking through the current soft patch, which is mostly (but not fully) a function of weather-related distortions.

The advent of today’s high-frequency data proved poor for domestic economic growth prospects. We did, however, know this was coming as previewed in our 9/15 note titled, “Hurricanes Aren’t Good for GDP, #Quad3 and Dupree”.

Specifically, Real PCE growth slowed -10bps to +2.5% YoY in AUG, confirming the slowdown seen in AUG Retail Sales. Obviously Hurricane Harvey had an impact with Utilities consumption slowing to -8.1% YoY from -3.6% prior, but today’s data confirmed two very worrisome trends that were in place well before the hurricanes hit:

  1. The tailwind to consumption growth from a falling Personal Savings Rate continues to dissipate (-130bps YoY vs. -150 prior); and
  2. Growth in Real Disposable Personal Income is failing to pick up in the face of ongoing disinflation (+1.2% YoY vs. +1.2% prior); in fact, growth in this metric has been inexplicably trending sideways since the peak of inflation in Q1.

Oh Consumer, Where Art Thou? - REAL PCE

Oh Consumer, Where Art Thou? - UTILITIES SPENDING

Oh Consumer, Where Art Thou? - PERSONAL SAVINGS RATE

Oh Consumer, Where Art Thou? - PCE Deflator

Oh Consumer, Where Art Thou? - Core PCE Deflator

Oh Consumer, Where Art Thou? - REAL DISPOSABLE PERSONAL INCOME

On the positive side of the ledger, there were two unquestionably constructive data signals buried within today’s report:

  1. The deflator is set to buoy headline Real GDP growth by +20bps to +70bps if our GDP Deflator tracker range of +0.3% to +0.8% QoQ SAAR proves accurate; and
  2. Asset price inflation continues to buttress consumption growth on the high end, with spending on Luxury Goods accelerating to a new cycle peak of +11.7% YoY.

Oh Consumer, Where Art Thou? - GDP DEFLATOR

Oh Consumer, Where Art Thou? - LUXURY GOODS CONSUMPTION

Oh Consumer, Where Art Thou? - Wealth Effect  1

Oh Consumer, Where Art Thou? - Wealth Effect  3

Oh Consumer, Where Art Thou? - Wealth Effect  2

With the advent of this morning’s dour consumption data, yesterday’s positive revision to Q2 GDP, Wednesday’s mixed Durable Goods and Capex data and Tuesday’s “meh” Consumer Confidence release, our estimates for Real GDP in 3Q17E fell -8bps and -35bps, respectively, from our previous forecasts to +2.31% YoY/+3.15% QoQ SAAR. Those figures compare to +2.17% YoY/+2.56% QoQ SAAR for Bloomberg Consensus, +2.09% YoY/+2.31% QoQ SAAR for the Atlanta Fed and +1.90% YoY/+1.56% for the New York Fed.

Oh Consumer, Where Art Thou? - DURABLE GOODS

Oh Consumer, Where Art Thou? - CAPITAL GOODS

Oh Consumer, Where Art Thou? - CONSUMER CONFIDENCE

Oh Consumer, Where Art Thou? - U.S. Real GDP Estimates YoY

Oh Consumer, Where Art Thou? - U.S. Real GDP Estimates QoQ SAAR

As highlighted in the aforementioned note, our estimates still “feel” high given what we know about the timing of Hurricane Irma, but we’ll have to wait for the releases of SEP data for the model to adjust itself accordingly. Humans have feelings; predictive tracking algorithms do not.

Despite the conspicuous waning of household consumption momentum, the U.S. economy remains in #Quad1 for 3Q17E. That said, however, it’s critically important for consumer spending to snapback in OCT to justify the market(s) looking through the current soft patch, which is mostly (but not fully) a function of weather-related distortions. The market is expecting the Fed to look through said softness with implied yields on Fed Funds futures pricing in a 70% chance of a hike in DEC (up +680bps WoW). With Core PCE – Chairwoman Yellen’s preferred inflation metric – slowing to a 22-month low of +1.3% YoY in AUG, that elevated probability is imminently fade-able.

Oh Consumer, Where Art Thou? - U.S. GIP Model

In #Quad1 Goldilocks we trust,

DD

Darius Dale

Managing Director

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