KEY DATA: Consumption: +0.6%; Disposable Income: +0.4%; Prices: +0.2%/ Orders: +1.3%; Excluding Aircraft: +0.5%/ Home Sales: +17.5%/ Sentiment: -2.6 points
IN A NUTSHELL: “The economy may be booming along but households are just not so certain about the future.”
WHAT IT MEANS: It’s a data dump day and we sure got a lot of them – and almost everyone was really good. First, it looks like consumers hit the stores and websites really hard in November as consumption rose solidly. This was not a month where soaring vehicle sales drove things. Indeed, durable goods spending was flat. Demand for nondurables and services soared, though. Can households keep it up? I am not sure. Disposable income did increase solidly, driven by a good but not great rise in wages and salaries. But what troubles me, and it has for several months now, is the savings rate. It fell again, dropping to 2.9%. Except during the insane housing craze, this rate was never seen. That raises real questions about the sustainability of consumer spending, even with tax cuts coming next year. As for prices, they rose moderately, but excluding food and energy they were up just a touch. Over the year, the increase remains below the Fed’s 2% target.
After investing like crazy businesses took a wait and see attitude in November. Private sector capital spending fell slightly. Nevertheless, it was still 5.1% above the November 2016 level, which clearly indicates that the investment slump is over. The tax bill will only add to the spending, though it is hard to know when and by how much.
All week we have been getting really good housing numbers. Today we got a great one. New home sales, which had been floundering, skyrocketed in November to the highest level since July 2007. The increases were strong in every region but it was the West where the gain was really outsized: Sales rose by 31% there. The supply of homes is exceedingly low and that should trigger even more construction.
Despite all the great economic data, the passage of a tax bill and the exuberant spending, consumer sentiment fell in December. Though the University of Michigan’s index eased, it remained at a very high level. Respondents are very happy about current conditions. It is the future they are somewhat less confident about.
MARKETS AND FED POLICY IMPLICATIONS: The run of strong economic numbers clearly indicates the economy is in great shape. There are few major imbalances, save the issue with consumer spending. Keep in mind, the tax cuts are heavily loaded toward the top end of the income ladder, with lower income households getting little and middle income families seeing only moderate cuts. Yet that may work to the economy’s advantage. Without any major windfall, most of the tax breaks that go to the lower and middle-income groups should be spent. That could support spending even if wage gains don’t accelerate significantly. While some large firms have announced bonuses and/or wage increases, small and most mid-sized businesses don’t have the wherewithal to do that. Between seventy-five and eighty percent of all private sector jobs are in small to mid-sized businesses. That means the bonus/minimum wage announcements make for good PR but not necessarily strong income gains for workers. And it is wage increases that really matter. Let’s hope the added growth that should derive from the tax cuts will force companies of all sizes to increase worker incomes. If that happens, the economy could really boom.