PIMCO: Commentary from Tiffany Wilding on U.S. GDP, PCE, and the Fed
By Tiffany Wilding, Economist, PIMCO
What happened: Yesterday’s U.S. economic data most reflects the condition of the economy before the Iran conflict. There are three high-level themes in the 1Q real GDP data: (1) AI related investment remains strong, despite stagnant investment trends elsewhere (2) consumption held up despite subdued real income growth, but that was funded by a decline in the savings rate (3) elevated 1Q core PCE inflation was driven by firm core goods inflation (and some idiosyncratic things in services) - importantly the labor market is not a source of above target inflationary pressures.
What does it mean: Before the Iran war, economic activity was solid, but with fragilities and divergent trends under the surface (AI, and consumer savings draws continue to power the economy), and the key issue looking forward remains the impact of the ongoing energy disruptions. In addition to heightened focus on energy market trends, it’s critical to closely monitor how well (or not) real consumption is holding up to the current real income shock. While the US is more insulated than other countries by its net energy import status, it will not be immune if physical disruptions contribute to a larger global stagflationary shock and tighter financial conditions. The competing forces put central banks in a tough position.
What’s next: Yesterday’s data shouldn’t materially change the Federal Reserve outlook, and we are still calling for 1 cut in 2026. The Fed has a lot of reasons to shift in a modestly hawkish direction at the April FOMC. We did get 3 hawkish dissents; however, Federal Reserve Chair Jerome Powell was balanced in his press conference discussion. He flagged that more FOMC members wanted to eliminate the implicit easing bias in the statement, but a majority did not. Furthermore, Powell, argued that given the elevated uncertainty around the duration and economic effects of the energy supply shock, there was no real value in sending a strong signal around the Fed lean. This suggests to us that a core group at the Fed is just as worried about the recessionary effects of this shock, as the inflationary effects (something we have been arguing as well), and elevated starting real yields gives them scope to wait and see.