Moneybeat: Recent CPI and PCE reports

MARY REICHARD, HOST: Coming up next on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business markets and the economy with financial analyst and advisor David Bahnsen. David is head of the wealth management firm the Bahnsen group, and he is here now. David, Good morning.

DAVID BAHNSEN: Well, good morning, Nick, good to be with you.

EICHER: Well, David, let's begin with the quarterly GDP report. It came in below expectations. What do you take away from the performance of the first three months of the year?

BAHNSEN: Well, it definitely was not a good report. And they were expecting about 2.5% real GDP growth annualized in the first quarter, and it came in at 1.6%. And I think that there's a number of factors that kind of weighed on things, and I don't think that we should forget the historical context. Let me first point out the 2.5 was the expected number, and that is still below the 3.1% that we have averaged since World War II. And so we have had very, very few periods where we have even gotten back up to our regular trendline growth. And people can point to a few of the quarters post COVID, but those are obviously highly misleading, because it was coming off of a total collapse in GDP from the shutdowns. And then you had a big percentage move higher as things were, were normalizing. So there's a few outliers that we've had along the way. But from a basic trendline standpoint, we very much struggled to get to normal economic growth. And then this particular report was below that 2.5 expectation. The 2023 number full year was quite robust, and it was it was a surprise to many people. Not only that the number was pretty good, but that most started the year believing a recession was coming and the Fed tightening. So now to see a more disappointing number, I think it has opened up questions as to where we go from here.

EICHER: So who answers those open questions, David? When you say that, do you mean to refer to the Federal Reserve?

BAHNSEN: I think it's a question that people who are looking at economic growth in any number of contexts are asking. I don't believe that the Fed ought to be a very significant player. I wrote a piece for WORLD Opinions about this last week. I think the idea of the Fed being a key role player in creating economic growth is a very misguided idea. Although, do I think the Fed might look at slowing GDP as some factor in rationalizing an eventual rate cut? I think it's certainly possible. The 1.6% was the slowest we'd had in almost two years. And I think that when you look at the components of it, you have to kind of wonder where that business investment is coming from. The business investment wasn't the worst detractor, by the way. And that's always the factor I care about most. The largest drag was net exports. And, and, you know, the personal consumption side was healthy. But see, it always is. I mean, unless you're just in a real credit crisis. It takes an awful lot of economic headwind to get the American consumer to stop spending. Homebuilding was positive in the data for the first quarter. And so all things being equal, you're really talking about something was more trade related as being the biggest downward pressure. That allows us to kind of wait to look to the next quarter to see what sort of trend we get out of this. If you recall, Nick—it's been almost two years—but this was a theme you and I discussed literally two years. I recall it very well, when inventories were the big factor in a very low GDP number. And my comment was, well, the that is put downward pressure on the number here, but it's not generally something that is sustained. It tends to have a one-and-done impact, where things like business investment tend to be more sustainable. So, I'm curious what the next quarter is going to play.

EICHER: Okay. David, last week, speaking of personal consumption, we did get a look at the latest PCE, the government index of personal consumption expenditures. That would be the Feds preferred inflation gauge over the CPI, the Consumer Price Index, but a lot of ink spilled on how the PCE remains above the Feds target 2%. So, persistent inflation.

BAHNSEN: I probably missed some of those reports just in the sense that it came in exactly as was expected and bond yields actually dropped on the news, and you had a pretty big week up in the markets. And then you had a particularly on the Friday that the PCE number came the market higher. But I don't think the market was responding higher to the PCE report. It came in at 2.7% year over year. That's exactly what was expected. The CPI number for the month came two weeks earlier. And as long as the PCE number is coming two weeks after CPI, it's difficult for the PCE to become a big news story, because everyone is focused on CPI. Although the Fed still says, and I believe them, that the PCE is their number. I certainly believe it's a better number. And you notice that the CPI number came in at 3.4, the PCE was 2.7. And that has everything to do with how housing is being measured. But there were no surprises in the PCE number. I think we've had a few weeks now to absorb a number of facts that are all true right now about the state of inflation. There's a lot of elements that we measure prices of, that prices have come down over the year. There's other elements that prices have gone up in the year. The one that moved the needle most last month was auto insurance. And then there's things that are just perpetually holding numbers in a certain place. And when you're talking about headline inflation, oil is going to be a very big factor there. Oil really helped inflation to go lower and 2023 when it dropped a lot from the 2022 levels. And oil coming a bit higher over the last couple months has added two tenths of a point to the headline number. But the basic theme here is what the shelter number will end up doing in the months ahead, and how that will give cover to the Fed, I think, to start cutting rates. And there's so much complexity in the way all this is measured. But no, I don't think, I don't think the PSE number was a lot of hype. And both stock and bond markets on Friday seem to agree with me.

EICHER: DAVID, I'd like to circle back to where we started today at GDP for our ”Defining Terms” this week. We've discussed the differences between the PCE and the CPI. But the figure that we use to quantify economic conditions, that's GDP. So what is it? And what does it consist of.

BAHNSEN: So the letters actually stand for a gross domestic product. And it's essentially a way of measuring output in the economy, the goods and services that are produced. And it's meant to be a barometer for economic health, how much the economy is growing. And while it is difficult to measure precisely—and there's always going to be some debate as to how one goes about measuring it—I do agree that it's the right way to think about an economy. That an economy is growing when its output is growing. And in fact, there's a metric called gross output that I even like better, I think is very important. But the way in which we measure it is to include components of personal consumption. And then the non-residential fixed investment, which is a fancy term for business investment. And then we look at trade, which is imports minus exports. And then the effect of government spending. And then finally, inventories. And when you look at these components put together, you get some feel for what the total output in the economy is. And it's been pretty consistently measured for some time. So even if people would like to turn a knob here and there and how it's measured, it does give a pretty consistent reference over time to how we think about the gross domestic product of the country.

EICHER: All right. David Bahnson, founder, managing partner, chief investment officer of the Bahnson group. You can check out David's latest book Full-Time: Work and the Meaning of Life. It's at fulltimebook.com. David, I hope you have a great week.

BAHNSEN: Thanks so much, Nick. Good to be with you.

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