May Consumer Spending and Income and June Confidence

KEY DATA: Consumption: +0.1%; Disposable Income: +0.5%: Prices: -0.1%/ Confidence: -2 points

IN A NUTSHELL: “Despite better income growth, worries about the future may be restraining household spending decisions.”

WHAT IT MEANS: The consumer needs to get going if the economy is ever to reach the promised 3% growth rate and right now, that doesn’t seem to be the case. Consumption was up minimally in May as households bought few goods. Both durable and nondurable goods purchases were off. On the positive side, spending on services, which is the largest component of consumption, was up solidly. Hopefully, that will continue. So far this quarter, consumer demand is rising at a roughly 2.6%, so it will take stronger growth in June to get to the magic 3% number. Can that happen? I am not so certain. Income gains were strong in May, but the rise was mostly due to a surge in dividends, which don’t get translated into demand very quickly. Meanwhile, wage and salary increases were modest. And what people make, they seem to be stashing away as the saving rate is rebounding. On the inflation front, prices were largely flat, especially when food and energy were excluded. Over the year, both the headline number and the core, which excludes the volatile components, posted declines. That is something that the Fed will likely watch closely.

Consumer confidence is continuing to moderate. The University of Michigan’s Consumer Sentiment Index fell in June. The level remains solid, but there was a further deterioration in the outlook for the future. That stands in contrast to the view that the economy is getting better. Let’s see now. In Washington, the politicians are saying the economy is terrible but the future is bright. Consumers seem to be saying things are pretty good and getting better, but they are not so sure that trend will continue in the future. Does anyone in Washington have a clue to what is going on?

MARKETS AND FED POLICY IMPLICATIONS: Today’s reports don’t point to any major acceleration in growth in the second half of the year. Wage and salary gains are mediocre and without a better increase in worker salaries, consumption can grow only so quickly. We will get a better picture of household spending on Monday when June vehicle sales are released. Unless there is a bigger than expected pop in demand, it will be hard for GDP growth to have been robust this quarter. We could get a 3% number, but that might be due to a rebound in inventories. Sales, though, look like they were soft. We have a month before we know that number, which comes out after the next FOMC meeting. So the Fed looks to be on hold at least until September. As for investors, all eyes remain on Congress. Can the gang that cannot think straight get anything done this year when it comes to tax reform and infrastructure spending? I just don’t know.

For all those who are heading out today for a nice, long July 4th weekend, have a wonderful time.