In a prior post, we mentioned that the consumer component of GDP declined for the third consecutive quarter in Q4 2019. January 2020 showed that real consumer income and spending are continuing to slow. Real Disposable Personal Income (DPI) growth dropped to 2.3% year-over-year, which is the lowest level since 2016. Real Personal Consumption Expenditures (PCE) growth came in at 2.75%, which is well below the cycle peak of 3.7% reached in August 2018. Real PCE grew just 0.10% month-over-month in January and the pace has been decelerating for the past several months. The lack of real income growth could explain the sudden deceleration in real retail sales that started in August 2019 and has continued into January 2020.
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For this trend to change, corporate profit growth will need to rebound, or inflation will need to slow more than nominal spending and incomes. With the current expectations for global U.S. economic growth being lowered, it seems unlikely that corporate profits will accelerate in the first half of 2020. A stronger Dollar and lower commodity prices may bring down inflation, but the impacts of weaker growth may go beyond offsetting the benefits of lower inflation.
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Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC
