KEY DATA: Consumption: +0.6%; Disposable Income: +0.5%; Prices: +0.2%/ Pending Sales: -2.6%; Over-Year: -6.7%/Jobless Claims: +10,000
IN A NUTSHELL: “The strong spending and income numbers don’t hold up to careful scrutiny, so don’t assume the economy is surging again.”
WHAT IT MEANS: There is one warning I repeat consistently and that is: “the devil is in the details”. That saying is quite accurate when it comes to the October spending and income report. On the surface, it looks like consumers went wild. Spending surged and the increases were across the board and that is the good news. While this is a good report, there are lots of holes in it. The biggest consumption gain came from a massive jump in services demand. The major factor there was spending on utilities and gas – weather? Expect that to unwind in the next couple of reports. Durable goods purchases were up sharply, but there was a jump in vehicle sales that looks to have been driven by flood-related replacements. That too will wind down going forward. On the income side, you would think that workers are finally getting paid more money. Wrong again. Wage and salary gains were modest, which is another way of saying disappointing. Instead, farm income surged because the government bailout of farmers hurt by the trade war was in the data. Nonfarm proprietors’ income also soared, though it isn’t a clear why that happened. With spending exceeding income, the savings rate declined again. One unambiguous number was inflation, which is showing no signs of accelerating.
Another housing number, another indication that the residential real estate sector is fading. The National Association of Realtors reported that pending home sales fell for the tenth consecutive month. The only region that reported a rise was the Northeast, which was up modestly. Over the year, the index has fallen sharply and given the sudden despondence in the homebuilders’ ranks, it is not clear that trend will change anytime soon.
New claims for unemployment insurance jumped last week. November is always a very choppy month; so don’t read too much into the rise.
MARKETS AND FED POLICY IMPLICATIONS: The income and spending report was a good one, but it was hardly great. With special factors at work, the best we can conclude is that the consumer is still spending but households are not flush. High levels of confidence, though, do imply a solid holiday shopping season. But unless wage gains accelerate, the early part of next year could be ugly as households cut back to pay for their holiday excesses.
Fed Commentary: Yesterday, Fed Chair Jerome Powell delivered a speech that has been interpreted to mean the Fed will be slowing its rate hike pattern. The conclusion came from a change in the description of how close the Fed is to “neutral”, the point where rates are neither adding to nor subtracting from growth. Yesterday, he noted that the Fed was “just below the broad range of estimates of the level that would be neutral for the economy”. Just below is the operative phrase here since in October, he noted that the Fed was “a long way from neutral”. This appears to be a huge change in emphasis and it brings up the question, what has changed over the past month to merit a significant recalibration of the stance of monetary policy. The answer is, very simply, little. The stock market has declined, but the Fed is not tasked with keeping up equity prices. Economic growth has moderated, but anyone who doesn’t work in the White House has been saying that would happen and in any event, growth remains above trend. Uncertainties about the world economy have increased, but no one is forecasting a worldwide recession. The president has stepped up his attack on Chair Powell, but it is hard to believe he caved because of political pressure. Unfortunately, it looks that way. That is very disturbing since protecting the Fed’s independence may be the Fed Chair’s most important job. Without it, policy could not be trusted.
In defense of Mr. Powell, it has been suggested he was referring to the “range of forecasts” for a neutral Fed funds rate. He did say range in in his comment. But if he changed his reference to the range rather than the level, he was terribly unclear in his presentation. If that is indeed the case, he set back the attempts at making the Fed more transparent more than any Alan Greenspan talk ever did – and Greenspan’s intentions were always to keep Fed intentions opaque.
Basically, Chair Powell has muddied a lot of waters. He needs another speech soon to clarify his thinking and where he believes monetary policy is going. Right now, the best we can say is that he whiffed badly. While that happens to everyone, it should not happen to a Fed Chair.