On Friday, the US government’s Bureau of Economic Analysis had some good and some not so good news: the good news was that the final estimate of Q4 GDP was revised higher from 1.0% to 1.4% (driven by an odd rebound in spending on Transportation and Recreational services). The bad news was that pre-tax earnings tumbled 7.8%, the most since the first quarter of 2011, after a 1.6 percent decrease in the previous three months, suggesting that with corporate profitability crashing, it is only the “strong” US consumer that is keeping the US economy afloat.
Unfortunately moments ago we got a revised glimpse of the true state of the US consumer, and it was anything but strong.
As we reported moments ago, while the February personal consumption expenditures (aka personal spending) – that all important data about the well-being of the US consumer – was in line with expectations rising 0.1%, it was the January revision that was striking. From a 0.5% increase reported a month ago, it was now revised to a paltry 0.1%. In nominal dollar terms, this means that instead of US consumer spending a whopping $67.5 billion more in January, the increase was a paltry $14.7 billion, a delta of $52.8 billion!
As a result of the revision, that other most important indicator of consumer health, the savings rate, also jumped, and as of February, it is now at 5.4%, matching the highest print in four years suggesting that US consumers are far more eager to save (deflationary) than to spend (inflationary).
What this revision also means is that absent a massive rebound in March spending, or some dramatic revision to the February data next month, up to 0.5% of Q1 GDP was just wiped away.
Which is a problem: recall that last week the Atlanta Fed slashed its Q1 GDP estimate from 1.9% to 1.4%, matching the final Q4 GDP print.
As a result of today’s spending data, the Atlanta Fed will have no choice but to revise its Q1 “nowcast” to 1.0% or even lower, which would make the first quarter the lowest quarter since the “polar vortex” impacted Q1 of 2015, and the third worst GDP quarter since Q4 2012. It means one-third of already low Q1 GDP growth has just been wiped away.
Finally, it also means that the Fed is now officially stumped because despite core CPI and PCE continuing to rise dangerously high on soaring rent inflation, US economic growth is simply not there, which will make the case for a June rate hike that much more improbable. On the other hand, this is just the “great” news stock trading algos needed to hear: no June rate hikes, and a slowing US economy means the S&P500 levitation party can continue indefinitely.
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