KEY DATA: Consumption: +0.4%; Disposable Income: +0.4%; Prices: +0.2%/ Confidence: -1.5 points/ National Home Prices: +0.3%; Over-Year: +5.8%
IN A NUTSHELL: “With income growth solid, consumers should be able to keep spending at a decent pace.”
WHAT IT MEANS: If there is any possibility that the economy can break out of its 2% growth trend, the consumer will have to play a major role. To do that, wages and salary increases have to accelerate and that may be happening. Incomes grew solidly in April, the third month out of the last four where the increases were strong. That is another sign that the tightening labor market is finally starting to force firms to pay up a little more for workers. And households are taking that money and spending it. Consumption was also pretty good in April as people bought a lot more goods. Unfortunately, the demand for services was largely flat and that component is nearly two-thirds of consumption. Even with the weak services spending, consumption is growing above 2% so far this quarter, which is a good start. As for inflation, prices continue to rise moderately. Actually, the year-over-year rise has decelerated and is now below the Fed’s 2% target.
Consumer confidence has started to wander around. Today, the Conference Board reported that their confidence index fell in May as expectations moderated. Last week, the University of Michigan said that consumer sentiment was largely flat as the current conditions measure declined. Put the two together and it appears that the Trump confidence bump has run its course. Given all the chaos we saw in May, that confidence hasn’t faded sharply is a good sign that people are still holding out hope that things could change.
With the supply of homes limited, is it any surprise that housing prices continue to rise solidly? The S&P CoreLogic Case Shiller national index of home prices was up again in March and over the year, the price increase is approaching 6%. This is somewhat below the Federal Housing Finance Agency’s reading, but both are indicating that the price gains are accelerating.
MARKETS AND FED POLICY IMPLICATIONS: Did the government change the date for Memorial Day to April? That is the only reason I can explain temperatures in the sixties this past weekend. The government gets blamed for everything else, so why not the unseasonably cool Memorial Day weekend weather on the East Coast? As for the economy, today’s number provide hope that second quarter growth will be a lot better than the anemic, but at least upward revised, first quarter increase. This week we get vehicle sales and the May jobs report and those two should help determine what the quarter will likely look like, though I doubt they will influence what the Fed will do at the next FOMC on June 13-14. I expect vehicle sales to rise a little from the May pace but job gains could be below expectations of about 185,000. I would not be surprised if the payroll rise is around 140,000 and the unemployment rate ticks upward. The average monthly number of jobs added so far this year is 185,000, which I don’t think is sustainable. Something in the 140,000 range would bring the monthly average closer to the 150,000 to 175,000, which is what is believe is reasonable given the growth rate and the shortage of workers. But the number to watch is average hourly earnings. That is really the only measure in the employment report that attempts to gauge wage pressures, and it should be strong. It isn’t a good measure, but it is the best we have on Friday, so look for it.