1. In April, households saw incomes increase as employment and inflation contributed to nominal incomes. Alongside this increase in employment income, we also saw continued support from income on assets total incomes. Below we show the composition:
2. Personal income increased by 0.36% in April, disappointing consensus expectations of 0.4%. This print contributed to a sequential deceleration in the quarterly trend relative to the yearly trend.
3. The primary drivers of this print were Employee Compensation (0.6%) & Income on Assets (0.25%). Over the last year, Employee Compensation (3.36%), Rental Income (0.5%), & Income on Assets (0.96%). have been the primary sources of the 5.43% growth in income.
4. We zoom into employee compensation to show the industry-wise breakdown of this increase in income. Further, we break these gains down into their macroeconomic drivers, i.e., employment, real wages, hours worked, and inflation.
5. As we can see above, professional and business services continue to be the bastion of the current resilience of the consumer economy. On the other end of the spectrum, financial activities continue to see weakness, especially ex-inflation.
6. It is important to recognize that real incomes this month were weak. Our estimates indicated a -0.10% contraction; official data came up 0.10%. We show the sequential evolution of the data below. We also zoom out to offer more context:
7. Next, as previously alluded to, we show how income on assets continues to contribute to income growth, now contributing 1% of the total 5% growth in nominal income:
8. This increased income was spent on the economy, with motor vehicles seeing strong nominal and real spending. Nominal consumer spending increased 0.84% in April, surprising consensus expectations of 0.3%.
9. This print contributed to a sequential deceleration in the quarterly trend relative to the yearly trend.
10. We zoom out to show the drivers of current trends in spending. Other Nondurable Goods (0.63%), Housing & Utilities (1.49%), Health Care (1.39%), Food Services & Accommodations (0.65%), & Other Services (0.88%). have been the primary drivers of the 6.73% growth in spending.
11. This increase in spending was a drag on savings, which came alongside a decrease in mortgage borrowing, dragging on total borrowing.Overall, This nominal spending continues a trend that has been in place since last year, i.e., one of declining sustained savings reductions.
12. However, durable goods spending, home prices, and equity market prices came together to create an increase in assets, increasing household net worth.
13. According to our latest estimates for the month of April, household net worth increased by 2.9%, driven by a 2.81% and -0.08% change in assets & liabilities, respectively.
14. We show the evolution of our household net worth estimates below, which show that net worth has contracted -0.97% over the last year:
15. Over the last year, household assets have fallen by -0.97%. Below, we decompose these changes in assets into risk assets (equities, corporate credit, etc.), real assets (real estate, consumer durables, etc.), and cash assets (checking, savings, money markets funds, etc.).
16. Risk assets, real assets, and cash assets have contributed 0.29%, -0.36%, and-0.9%, respectively, to the total change in household assets over the last year.
17. Contemporaneously, household liabilities have grown by 9.73%, driven by a 7.99% rise in mortgages and a 1.73% increase in consumer credit. We show our estimates for both below, along with the official data:
18. Overall, the latest data for April suggests a more resilient consumer, supported by strong employment and income on assets. Employment remains the stronghold of the economy and an offsetting force to weak business conditions.
1. While over 300 line items drive CPI that we have visibility into, we can condense these measures into four broad categories that account for the bulk of the variations: food, energy, transportation, and shelter. We show this composition below:
2. Both economically and statistically, these categories explain about 85% of the monthly variation in CPI. Therefore, we think it makes sense to approach our dissection of CPI by evaluating these areas.
3. We believe that food & energy prices can continue to contribute to a softening in CPI, but the swing factor will likely be transportation inflation. So far this cycle, transportation has been a net support to the disinflation we expected over the year.
Disinflation requires a Recession, but we are not there yet 🧵
1. Economic #cycles generally follow cause-and-effect templates, and this cycle has followed the archetype, albeit with its unique twists.
2. As an economic expansion ages, the ability for output to accelerate begins to stall as the economy runs up on capacity constraints in the form of production and labor limitations.
3. However, if nominal growth remains strong relative to debt service burdens, credit and income can support employment and production to remain faster than population growth and production capacity.
1. Through April, our systems place Real GDP growth at 1.37% versus one year prior. Below, we show our monthly estimates of Real GDP relative to the official data:
2. Below, we show the weighted contributions to the most recent one-month change in real GDP, along with the recent history of month-on-month GDP. Additionally, we show the contribution by sector to monthly GDP in the table below.
3. April saw an improvement in investment activity, contributing significantly to GDP data. Combined with our inflation estimates, this place nominal GDP at 5.31% versus one year prior:
1. Over May, the S&P 500 rose 0.87%, primarily driven by valuations. Earnings expectations & valuations contributed 0.13% & 0.74% to the 0.87% rise in markets. Below, we show the sequential evolution of market prices, along a decomposition:
2. Over the last year, the S&P 500 has been dominantly driven by valuations, with total returns rising by 1.03%. We show cumulative returns on the S&P 500 over the last year, decomposed into earnings expectations and valuations:
3. We further decompose these yearly returns into their sector contributions. We begin by showing the primary drivers of the S&P 500. We show the top three drivers in blue (Technology, Financials, Industrials) & the bottom three in red (Consumer Disc., Healthcare, Energy):
Do not worry in case you missed out on any action from @prometheusmacro last week. Below we pen down all the key takeaways & opinion threads that were shared with the wider community. Make sure to #SubscribeToday so that you don't miss any of the updates.
1. We introduced the 'Prometheus Daily Trend Signals' to share the latest trend updates for all 37 ETFs across four asset classes daily.
1. The current macroeconomic picture remains where heightened nominal demand continues to press against the economy's capacity constraints, creating heightened inflation.
2. We think these dynamics will
likely be resolved through the Fed's tightening cycle by raising interest burdens in the economy relative to incomes, creating pressure on profitability for companies, and leading to an eventual lay-off of
workers.
3. Therefore, the key to understanding whether the Fed's hiking cycle has been adequate is
whether profits will contract. This profit contraction will likely come from declining topline, sticky wages, and increasing debt service costs.