Deutsche Bank’s Joe LaVorgna is still not ready to push the panic button on the economy.In his latest macro note, he homes in on what is likely causing GDP to drag:
“Weakness in services spending has been unprecedented: the data show spending actually fell during the last recession. This is something that never happened before. Moreover, spending on services remains depressed, rising just 1.4% in inflation-adjusted terms over the past year.”
Where is this noise coming from? LaVorgna says housing — in particular, rents and utilities. “Housing-related spending needs to turn up if the overall trend in consumption and by default real GDP is going to improve, as we continue to believe it will,” he writes.
The sources of that belief are climbing rents and warming weather:
“We expect housing rents, which account for about 84% of spending on housing and utilities-related services, to continue to rise in lagged response to a new cyclical low in the residential vacancy rate…Moreover, housing rents should also get a lift from higher household formations, a function of an improving labour market.”
“We expect a return to more normal weather patterns to lift household utility usage, and should the summer months produce above average temperatures, electricity usage should rise commensurately, adding a further lift to measured consumption.”
The one caveat in this trend, LaVorgna believes, is that while inflation will moderate through the rest of year, there will be a concurrent “troubling uptrend in core inflation—driven predominantly by services—which will be taking place beneath the surface.”