Since the start of the second Trump administration and its strategy of imposing tariffs, we have stated that we are not fans of tariffs as an economic policy instrument. We have also noted that many of the tariffs imposed are punitive. But even if we don’t like tariffs, the biggest issue today is probably not the tariffs themselves, but the uncertainty that these on-and-off, on-and-off tariff decisions create. This week’s Court of International Trade decision, plus the appellate court’s suspension of that decision, will add many more layers of uncertainty that will continue to make consumers and firms’ decision-making process more daunting. At the same time, the court’s decision will probably reduce the negotiating power that the administration thought it would have when dealing with other countries. The judicial process in the US is not easy, and Trump knows very well how to make the process a long one, so it is difficult to know how this chapter ends. However, as we have said many times since this process started, the longer the uncertainty remains, the higher the risks will be for economic activity going forward.
Q1 real GDP revision
Real GDP during the first quarter of the year was revised up slightly, from a decline of 0.3% to a decline of 0.2%, according to the Bureau of Economic Analysis. The revision was due to a relatively stronger investment profile, but fundamentally a larger contribution from an accumulation of inventories as well as a weaker than previously estimated contribution from personal consumption expenditures, i.e., consumer demand. At the same time, the drag from government expenditures and investment was lower than what was originally estimated.
The large positive contribution from the change in inventories, while positive during the first quarter of the year, could become a drag during the next several quarters as firms start to bring down those inventory levels, especially if consumer demand continues to expand and the uncertainty regarding tariff implementation continues for longer.
PCE inflation, personal consumption expenditures, and personal income
Today’s release of the personal income, personal consumption, and the PCE price index numbers for April, the first month of the second quarter of the year, was very encouraging, even though some of those encouraging numbers are going to be very short-lived. First, and from a consumer point of view, it is clear that those Americans who can prepare for what is coming are doing so. That is, Americans have been slowing down consumption even as incomes have been growing at a healthy clip. That has meant that the saving rate has surged to 4.9% of disposable personal income, up from a rate of just 3.5% at the end of 2024.
Of course, not all consumers are in a position to increase savings, but those who can are doing it in preparation for higher prices in the future. The second very encouraging development was that the Federal Reserve (Fed) came within a whisker of hitting the inflation target of 2.0% “over the long term” and although this is going to be short-lived for now, it is nonetheless a great achievement, considering that so many analysts have been arguing that the Fed would not be able to achieve the 2.0% target due to structural changes.
April’s 2.1% increase in the PCE price index reinforces the Fed’s credibility, not necessarily in keeping inflation perpetually low, but in demonstrating its ability to bring it back to the 2% target when needed. This will be especially important as upcoming tariff pressures are likely to push inflation higher in the coming quarters. That is, the Fed has all the tools necessary to bring inflation down to its 2.0% target. This should give investors and those worried about the US dollar, great comfort.
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Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results.
Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the
U.S. dollar gains "strength" when compared to other currencies.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index(PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 12/6/2024
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