The US economy is definitely a “wolf in sheep’s clothing,” says Wells Fargo

But the general 1.6% growth was hurt by volatile aspects equivalent to a wider trade deficit and slower inventory replenishment, masking how resilient consumer demand continues to be, Wells Fargo economists said in a Thursday note titled “Wolf in sheep’s clothing: Soft.” GDP hides rising spending.”

Of course, consumers are spending less on goods, and the GDP report showed spending on expensive durable goods fell 1.2% on an annual basis, the note said. However, this was greater than offset by a rise in spending on services.

“Like a relief pitcher in the closing stages, services spending surged in the first quarter at a blistering 4.0% annual growth rate — the strongest increase in consumer services spending since the economic surge in 2021,” economists Tim Quinlan and Shannon Seery Grein wrote.

Apart from 2020 and 2021, when the info was distorted by the pandemic lockdown and reopening, service spending growth has exceeded 4 percent only thrice within the last twenty years, they added. This happened once in 2014 and twice in 2004.

“Higher interest rates are expected to dampen consumer demand; The problem for the Fed is: It doesn’t work,” they said.

In fact, demand within the services sector stays so strong that the sector’s price increase of 5.1% exceeded the broader core price increase of three.7%, which was already a quarter-on-quarter increase.

Meanwhile, real disposable incomes posted slower growth within the quarter, but Americans continued to spend faster, pushing the private savings rate to its lowest level since late 2022, the note said.

But trade deficit and inventory data masked more robust consumer numbers. Excluding the trade impact alone, the first-quarter report would have been consistent with forecasts, Wells Fargo said.

Another measure of underlying domestic demand that excludes the trade gap: inventories and government spending rose 3.1%.

“The last three quarterly numbers for this metric were all at 3.0% or higher, signaling healthy and stable growth,” Wells Fargo concluded. “Don’t underestimate this economy.”

In a way, the banknote represents a counter-narrative to the awful reactions elsewhere.

This is what EY chief economist Gregory Daco said Assets Previously, the GDP report not only undermined talk of a reaccelerating “no-landing” economy, but additionally warned that there was further downside risk if inflation persevered, eroding incomes and tightening financial conditions stayed.

David Russell, global head of market strategy at TradeStation, also said Assets that stagflation is a growing threat. “If inflation doesn’t improve with such weak growth, one has to wonder whether the trend towards lower prices will continue.”