Economic data points to a two-sided economy

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Stock prices continue to soar, thanks to heavy investments in AI and an investor class willing to shrug off the impact of the Iran War, but recent economic data suggests an economy that is very much two-sided. 

The U.S. economy performed worse than initially expected in the first quarter, as consumer spending and investment proved less resilient than expected, according to new federal data on Thursday.

According to the U.S. Bureau of Economic Analysis, real gross domestic product rose 1.6% in the first three months of the year, down from the agency’s initial estimate of 2%. 

Consumer spending, which accounts for two-thirds of the economy, rose 1.4%, lower than the 1.6% that was initially estimated.

Disposable personal income declined in April, by less than 0.1% compared with March. Consumers spent more and they saved less. The personal savings rate declined to 2.6% in April, the lowest rate since 2022—the last time that gas prices spiked. 

Outside of that period, the savings rate has not been this low since 2007, at the outset of the Great Recession. 

On the bright side, the credit card delinquency rate has been stable, at 2.92% last month. That’s higher than it has been in more than a decade but well below the rates seen during the Great Recession and beforehand.

Much of the economy has been driven by wealthier consumers whose spending is often tied to their wealth as much as their income. Moody’s Analytics this week said that the top 10% of U.S. earners are now responsible for 49.2% of total consumer spending—a historic high, dating back to 1989, according to the Wall Street Journal.

The stock market has more than recovered from steep declines seen in March, after the start of the Iran War. The S&P 500 Index is up more than 10% so far this year, lifted largely by corporate spending on AI. That has helped keep wealthier consumers spending.

But weak overall personal income is a real challenge for restaurants, which are more heavily dependent on middle- and lower-income consumers for broad-based growth. 

First quarter same-store sales varied widely from one chain to the next, a clear sign that consumers are getting pickier. Restaurant chains are offering more aggressive deals than ever, such as Del Taco, which this week started pushing a large value menu, including a burrito priced as low as $1.

That said, April restaurant sales proved more resilient than perhaps expected given gas prices and other challenges. Restaurant sales increased 0.6% month over month in April, even though prices increased just 0.2%, according to federal retail sales data. Tax returns likely offset higher gas prices, fueling spending.

That said, sales rose just 2.7% compared with April a year ago, when spending was weak amid tariff-driven consumer challenges. That was lower than the 3.6% increase in food-away-from-home prices. 

Consumer sentiment remains historically low, according to the University of Michigan. Consumer sentiment fell for the third straight month in May and is now below June 2022 lows. Consumers are worried that inflation will get worse. 

All of which is to suggest that, despite what Wall Street might say, the consumer is under considerable pressure, which will likely keep life challenging for the industry this year.

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