KEY DATA: Consumption: -0.2%; Income: +0.1%/Employment Costs (Year-over-Year): +2.2%; Wages and Salaries: +2.1%; Private Sector: +2.3%
IN A NUTSHELL: “Household incomes are finally starting to rise but there is no rush to spend it.”
WHAT IT MEANS: Yesterday’s strong GDP report pretty much told us what happened with consumer spending during the summer and today’s report fills in the details about the monthly pattern. Very simply, there is no pattern. Consumption was flat in July, soared in August and fell in September. Part of that was a robust return to vehicle demand in August, which skewed the trend. But there were also ups and downs in the services and the nondurables components, so it is really hard to know what people have been thinking. The real issue, though, is can they afford to spend more. Two bits of information point to increases in incomes, but nothing great just yet. Personal income was up in September, but when adjusted for inflation, it was largely flat. That is, purchasing power went nowhere. Disturbingly, wages and salaries, the key to both spending and Fed policy, rose minimally during the month. That is important because the wage and salary component of the Employment Cost Index, an aggregate measure of compensation, has been accelerating. In the third quarter, private sector wages and salaries rose at the fastest pace in six years. Hopefully, the September moderation was just an aberration. We need greater increases in household incomes if the strong economic growth we have seen for the past two quarters can be sustained. Inflation remains totally under control.
MARKETS AND FED POLICY IMPLICATIONS: Fed Chair Yellen is looking for any sign that the tightening labor markets are finally causing wages to rise. That is not happening just yet, but the trend is in that direction. Worker compensation, especially in the private sector, is accelerating. It is not so high just yet that warning bells are being set off at the Fed, but another six months and we should be there. But the sluggish rise in wages in September is a warning that the pattern will not be clear-cut until employers start bidding for workers. Right now, that is happening only in a few industries, occupations and regions. It needs to be more widespread. The limited income gains imply that spending will continue to grow moderately at best. We need that to change if we are to get this economy into high gear. The key may be the holiday shopping season and if the consumer confidence numbers are any indicator, it could be really good. Today we saw the Thompson Reuters/University of Michigan’s Consumer Sentiment Index hit its highest level in over seven years. That came after the Conference Board’s Confidence Index also hit a seven-year high. Consumers are feeling good and it will only take a little more money to get spending to surge. As for the markets, it looks like investors actually think that economic fundamentals, not the Fed, will drive prices and if that is the case, people should be feeling pretty good right now.
KEY DATA: ECI (Private, Year-over-Year)): +2.0%; Wages: +1.8%; Benefits: +2.5%/Claims: 302,000 (up 23,000)
IN A NUTSHELL: “Wage and benefits pressures are barely starting to accelerate even as the labor market continues to strengthen.”
WHAT IT MEANS: If the labor market matters to Fed members and the concern centers around employment costs, then the quarterly Employment Cost Index should be an important number. Whether it is or not for others, for me it is another critical part of the picture and right now businesses are still controlling workers costs but maybe not as well as they had been. Private sector compensation costs rose at a solid pace in the second quarter though that came after an aberrant nonexistent increase in the first quarter. Both wages and benefits jumped. Looking over the year, though, the increases in total compensation, wages and benefits were all at the top of the range we have seen for the last couple of years but not above it. Public sector costs are rising at the same pace even though wages and salaries are barely budging. Looking across occupations, service workers are doing the worst, which is not surprise. Whatever gains in compensation we have seen have been centered in the professional and construction worker ranks.
Jobless claims jumped, but that was expected. Last week’s report was assumed to be a bit too low due to the random nature of vehicle sector summer shutdowns. The four-week moving average, though, was the lowest in over eight years and that is without adjusting for labor force size. If the claims numbers relate in any way to job gains, and I believe they do, then the July employment report which comes out tomorrow should be good. Given the robust June gain, I expect July’s to be lower but we could easily average between 260,000 and 275,000 for the two months. That would be impressive. The unemployment rate could also decline. I would not be shocked if it breaks 6%, though that is not in the forecast for this month.
MARKETS AND FED POLICY IMPLICATIONS: So far, so good, at least when it comes to controlling employment costs. Yes, the second quarter number was hotter than expected but the first quarter rise was strangely minimal. Average them out and there was not any major change in the rate of worker cost increases. Benefit expenses have accelerated a touch and wages seem to be moving upward, but the pressures do not look great. But the Fed has to look at least six to twelve months down the road and if the unemployment rate keeps declining, unless the law of supply and demand has been repealed for the labor market, compensation pressures simply have to increase. The issues are when and how fast. Most members of the Fed appear to believe it will be a lot later and not very rapidly but I am not that sure. Tomorrow’s jobs report will give us another piece of the puzzle and hourly wages should be watched carefully. Workers need more income to spend more and power growth to a higher level. That does not seem to be happening just yet but I think we will be seeing signs very soon.