U.S. Economy: Yikes.

Dan North | February 2023

Personal Consumption Expenditures

Two-thirds of all economic activity in the U.S. is driven by real (after inflation) Personal Consumption Expenditures (PCE). That measure has now fallen for two consecutive months, and that has only occurred in 5.9% of all observations going back to 1959 (ex-Covid). Goods are outpacing services on the way down. In both November and December, goods shrank -0.9% m/m, while services grew 0.2% in November but bottomed out at 0.0% in December. On a y/y basis, PCE growth has declined from 7.0% in December 2021 to 2.2% now. The fuel needs to drive consumption, and Disposable Personal Income (DPI) is shrinking at a -1.7% y/y rate.

This data is the strongest yet indicating that the U.S. is on the brink of a recession, if not already there.

At the same time, inflation measures in the report declined. The PCE deflator fell sharply from 5.5% in November to 5.0% in December, fully 2% below the June ’22 high of 7.0%. However, the core PCE deflator, which strips out volatile food and energy prices, and is also the Fed’s favorite measure of inflation, has been more stubborn. It has only fallen 1% from last March’s 39-year high of 5.4% to 4.4% in December, and it had been range-bound for the most recent six months before that.

By the way, this is why the Fed likes to look at the core rate of inflation – monetary policy can’t control things like the avian flu.


I tend to focus more on the monthly PCE report because it’s just for the most recent month. The same data is found in the GDP report but that report also includes November and October – it’s backward-looking. But we can look anyhow. Fourth quarter GDP grew at a shiny q/q annualized rate of 2.9% on the top. However, under the hood things were grimy. The y/y rate is now only 1.0%.  An inventory build was responsible for 1.5% of the growth. Net exports added 0.6% to the headline. But neither one of those measures true consumer demand. If you strip both of them out you get to a number called “Final Sales to Domestic Purchasers”, or final demand. That grew only 0.8% q/q annualized, and 1.0% y/y. The chart is for the last four quarters only, and the glide path is down, down, down.


New orders for durable goods leaped by 5.6% in December, but it was driven by a massive 115% increase in orders for civilian aircraft. A better proxy for business spending strips out volatile components and is called New Orders for Nondefense Capital Goods ex-Aircraft, or core orders. That number has been flat or negative for three of the past four months. The y/y rate, while still high at 5.2% is down sharply from 11.3% last December. Moreover, the most recent three-month trend is barely moving at 0.1% vs. 9.1% just four months ago. Other manufacturing reports have been quite negative as well. The ISM survey is well into contractionary territory, manufacturing industrial production is now shrinking at a -0.5% y/y rate, and some regional Fed manufacturing reports have been disastrous. I think it’s fair to say that the manufacturing sector is in recession already.


New home sales did tick up a bit in December. However they are down -27% since the Fed admitted that inflation was not transitory, thus signaling to the financial markets that the interest rates such as the 30-year mortgage would be rising, fast. Over the same period, existing home sales are down -33%, starts are down -19% and permits are down -29%. Sure sounds like a recession in the housing market to me.