Consumer spending, especially durable goods, spiked from the second quarter of 2020 to the second quarter of 2021. This was aided by a combination of increased incomes via fiscal policy and a lack of an ability to engage in services activities because of COVID. While incomes have started to come down (especially on a real basis) and durable goods spending has slowed, inventories have been increasing. This could set up a classic deceleration in the business cycle.
Personal consumption expenditures on durable goods increased from a low of $1.2 trillion per month in April of 2020 to a high of $2.15 trillion in April of 2021. Spending on durable goods has slowed since that point, outside of an increase during the December holiday season, and ended February 2022 at $2.15 trillion.
Much of the increase since April 2021 has been a reflection of higher prices, as real durable goods for February 2022 were $2.2 trillion, down from $2.4 trillion in April 2021.
This decline in real spending lines up with what has been occurring on the income side as well. Nominal incomes spiked in April 2020, January 2021, and March 2021 around the fiscal policy payments. Since April 2021, nominal personal income has barely changed, $21.5 trillion in February 2022 compared to $20.9 trillion in April 2021.
On an inflation adjusted basis, real personal incomes have declined since April 2021, from $16.1 trillion to $15.3 trillion in February 2022.
While real goods spending and incomes have been slowing, wholesale inventory levels have been growing by over 2% month-over-month in three of the last five months. Prior to October of 2021, wholesale inventories had only increased by over 2% on a month-over-month basis once since 1992.
This trend of falling real durable goods orders and income mixed with rising inventories will likely continue. Partially due to more difficult comparisons in consumer spending (especially goods) and income, leading indicators for goods orders remain weak. Many of the durable goods ordered in the United States are produced in China. This flows into the new orders and new export orders components of China’s manufacturing purchasers’ managers index (PMI). In the March 2022 update, new orders dropped below 50 again and new export orders declined to 47. Below 50 is considered a contraction in activity compared to the prior period. New export orders have been below 50 since April 2021 and new orders peaked around the same time. The last fiscal payment in the United States took place in March 2021.
Inventory levels building as real spending and incomes slow is common to see as the business cycle slows. Companies order for a level of demand that does not remain at prior levels and eventually they end up with more product than they can sell. This will likely continue for the next few months, leading to weaker corporate profits. This likely leads to a slowdown in order activity (already happening) in response to weaker sales. If this situation persists for long enough or gets bad enough, companies will have to cut more costs which leads to a reduction in employment. This leads to a reduction in spending, which feeds back into weaker sales and weaker orders. This is how recessionary feedback loops start.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC