American consumers and businesses pulled back on spending in April as a challenging policy mix around trade started to show up in the combined income, spending and trade data published on Friday.
While Americans tapped on the brakes on spending, which eased to an increase of 0.2% in April, domestic firms slammed the brakes on imports, which fell by 19.8% on a monthly basis following their aggressive purchases early in the year to get ahead of the tariffs.
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As a result, the reduced imports caused the goods trade deficit to fall to $87.6 billion in April, down from $162.3 billion in March. Industrial goods declined by 31.1% on a seasonally adjusted basis, automotive goods by 19.1%, capital goods by 3.1% and consumer goods by 32.3%.
While this data does not show an economy that is falling off a cliff, it is an example of how the threat of higher tariffs dramatically affects spending by businesses, first in the front-running of purchases to avoid higher costs, and then in the pullback once inventories are built up.
Income and spending
While a narrowing trade deficit will bolster gross domestic product for the second quarter following the 0.2% contraction in first quarter, it is hard to make the case that final sales—which is the best proxy for aggregate demand—will not slow.
That easing in final sales will create the conditions for continued noisy and confusing growth data this summer.
The 0.2% increase in spending in April was a notable slowdown from the 0.7% and 0.4% pace of the previous two months. On a three-month average annualized pace, personal spending increased at a 1.6% pace.
Personal income increased by 0.8% because of a 1.3% rise in proprietors’ income and a substantial gain of 2.8% in government transfers. Once one adjusts for government transfers, personal income grew at a much more sustainable 0.3% rate.
Disposable income increased by 0.8% as inflation growth continued to moderate, while compensation, wages and salaries advanced by 0.5%.
Inflation moderates
Inflation continued to ease in what will almost certainly be the last “clean” report before the impact of higher tariffs shows up in the pricing data. The top-line and core personal consumption expenditures index both increased by 0.1% as the year-over-year metrics arrived at 2.1% and 2.5%, respectively.
The underlying trend in inflation is a bit more challenging, with the top-line increasing by 3.2% on a three-month annualized pace and by 2.6% over the past six months.
The core PCE index increased at a 3.5% pace over the past three months and by 2.8% over the past six months. Overall service costs increased by 3.3% over the past year while goods prices fell by 0.4%, which is unlikely to continue as tariffs kick in.
One of the ironies of the new trade policy is that the Federal Reserve was about to achieve its long-term objective of restoring price stability and its 2% inflation target.
But with tariffs having been raised to an effective rate of 17.8%, that long-sought goal will remain elusive as businesses and consumers face higher prices.
The takeaway
American spending moderated in April as U.S. businesses pulled back significantly on imports after months of pulling forward economic activity to avoid higher tariffs.
This data only adds to the uncertainty around the economic outlook at a time when trade policy changes on an almost daily basis.
The U.S. economy’s reliance is being tested as business wrestle with the uncertainty as they make hiring and investment decisions.
Stay tuned because things are about to get a lot more interesting in the economy.
