Discerning the signal from the noise in data is always critical as an economy approaches potential turns in the business cycle.
One should expect plenty of noise inside U.S. spending data over the next couple of months as rising inflation, fluctuations in pricing and the threat of looming tariffs cause households to increase spending.
Producers and consumers have pulled forward economic activity to avoid potential tariffs, which has skewed hard data and dampened soft sentiment data.
These distortions are making it more difficult to understand the true condition of the consumer and the evolution of the business cycle.
Spending data for February and most likely for March will capture that pulling forward of purchases. We expect solid gains in income and spending in February when the data is released on Friday, following the spending slowdown in January.
One of our favorite spending indices is Visa’s discretionary spending index for the United States, which has risen since bottoming out last summer on the strength of disposable income gains.
Disposable income in U.S. households has been rising at a 4.4% rate in nominal terms and by 1.8% in real terms, bolstering the confidence of consumers.
Now, with another round of tariffs set to take effect on April 2, American households, flush with income gains, may be pulling forward purchases of durables that will see higher prices in the near term.
Producers, for their part, have accumulated greater inventories to avoid those trade taxes.
A look at the inventories-to-sales ratio in wholesale durable goods strongly implies a potential inventory overhang.
Most at risk are firms that rely on sales of machinery, equipment and supplies, metals and minerals excluding petroleum, lumber and construction equipment, furniture, and motor vehicles and parts.
Discretionary outlays by consumers will provide the signal around the noise of an uncertain time in the U.S. economy.
Should the economy further decelerate, a reduced pace of household spending and dampened sentiment could lead to a modest inventory correction.
Read more of RSM’s insights on the economy and the middle market.
