The Bureau of Economic Analysis dropped two reports before Thursday’s open, and together they describe an economy running on fumes it borrowed from itself.
Real GDP grew at a 1.5% annual rate in the second quarter, according to the advance estimate. That is down from 2.1% in the first quarter and short of the 1.8% economists surveyed by Dow Jones were looking for. The BEA credits increases in consumer spending, investment and exports, partly offset by a decrease in government spending — the miss came largely from federal outlays and inventories rather than from the private economy falling apart.
Inflation, meanwhile, refused to cooperate. Core PCE — the gauge the Fed actually watches — rose 0.1% for the month of June and sat at 3.3% year over year, matching expectations. The headline PCE index fell 0.1% on the month, leaving the annual rate at 3.7%.
The number nobody put in the headline
Personal income rose $54.9 billion in June, or 0.2% — below the 0.3% economists expected. Spending rose $65.2 billion, or 0.3%, right in line. Do that subtraction and the gap has to come from somewhere.
It came from savings. Personal saving was $646.1 billion in June and the personal saving rate fell to 2.7%. It was 3.0% in May. It was 4.5% in June of last year. That 2.7% is the lowest reading in four years.
Consumer spending is one of the three things the BEA named as holding GDP up this quarter. It is being funded, at the margin, by households drawing down their cushion faster than their paychecks are growing. That is a mechanism with an expiration date, and the date moves closer every month the gap stays open.
The Fed is now boxed in from both sides
Wednesday the Fed held at 3.50–3.75%, and three of its own members dissented in favor of hiking. The bond market took the hawks’ side: the 30-year Treasury yield jumped 10.5 basis points to 5.201% and touched 5.244% intraday, its highest level since July 2007.
Now put Thursday’s data on the table. A 1.5% growth rate is the argument for cutting. A 3.3% core inflation rate is the argument for hiking. A 2.7% saving rate says the consumer cannot absorb much more of either the inflation or the rates. There is no single policy setting that answers all three.
Equities did not seem to mind. The Nasdaq Composite jumped 1.5%, the S&P 500 rose 0.8% and the Dow added 0.5% as dip buyers came back in and chipmakers rebounded — driven far more by Microsoft’s 43% Azure growth print than by anything in the macro data.
Our take: Two prints, one story. The macro data says households are maintaining their spending by spending their savings, and P&G’s zero organic growth a day earlier said the same thing from inside a P&L — nobody bought more, nobody paid more. When the saving rate is 2.7% and core inflation is 3.3%, the consumer is running a deficit against their own balance sheet in real terms. That is exactly the setup where a decent-looking spending number turns into a bad one without warning, because the buffer does not degrade gradually; it runs out. If you sell to consumers, this is the quarter to check how much of your growth is coming from the same households funding it out of savings.
What to watch
- Whether the saving rate keeps falling. 3.0% to 2.7% in one month is a fast move. Two more prints in that direction and the consumer-resilience thesis is done.
- The second GDP estimate. Advance estimates get revised, and this one leaned on inventories and government spending. The revision will say whether 1.5% was a real slowdown or a composition quirk.
- The long end of the curve. 5.244% on the 30-year is the highest since July 2007. Mortgage rates, corporate refis and every leveraged balance sheet key off that number, not off the fed funds rate.
- September pricing. Three dissents to hike plus 3.3% core against 1.5% growth is the definition of a split committee. Watch how fast futures move on the next CPI.