Economic Highlights

The latest revisions to Q1 GDP showed that the economy grew slightly faster than originally thought, by +0.7% from Q4’23, up from +0.6%. One feature of the release concerned household balance sheets. Wages have been rising faster than inflation, and so real disposable household income also rose by 0.7%. It appears households have been tucking this surplus away rather than spending it, with the savings rate rising to 11.1% vs a pre-pandemic three-year average of 5.3%. That suggests relative prudence and should mean less risk if the economy weakens again – at least “rainy day funds” are being replenished. No doubt those savers are finding current interest rates attractive, but it also leaves open the possibility of greater spending power being released when rates are cut.

The US PCE consumption and inflation data did little to move markets. The key Core PCE Price Index year-on-year gain of 2.57% was in line with expectations and still trending lower. This was the lowest print since Q1 2021. However, although it might be a source of joy for economists and central bankers, it still doesn’t resonate with consumers who continue only to observe cumulative price increases of more than 20% since the beginning of 2020, a fact that is seen as one of the key impediments to Joe Biden’s re-election campaign. There was also a slight softening in the details of the consumption data, which, when combined with earlier revisions to Q1 GDP data, continues to suggest a slight soft patch. All eyes remain on employment data to judge whether this is developing into something worse.

According to the results of the latest German IFO survey, overall sentiment deteriorated slightly in June. The IFO Business Climate index declined from 89.3 in May to 88.6 in June. The current assessment and expectations components were both weaker. Results by sector show a stark divergence. In manufacturing, the business climate index remained in negative territory, declining in June after having increased in the prior three months. The trade and construction sector indices also remain deep in negative territory. However, the service sector index rose to +4.2 – near a two-year high. Overall, the data suggests that the German manufacturing sector continues to languish, with high interest rates and excess production by Chinese manufacturers leading to a poor environment for German exports. Meanwhile, the service sector is improving thanks to real wage growth, which has turned positive after contracting for the last two years. Tourism has been strong, with the hotel sector showing significant improvements.

The latest PMI data from China was mixed at best, with the Manufacturing headline index remaining in contractionary territory at 49.5 for the official survey, with weakness in new orders and exports. Non-Manufacturing ticked down from 51.1 to 50.5 vs an expected 51. However, the private compiled Caixin version, released a day later, rose slightly from 51.7 to 51.8 against a forecast 51.5. Net net, still no real signs of recovery to speak of heading into this month’s important 3rd Communist Party Plenum, at which there are still hopes for some sort of policy stimulus.