KEY DATA: Consumption: +0.5%; Real Disposable Income: +0.3%; Prices: flat; Excluding Food and Energy: +0.1%/Pending Sales: -1%
IN A NUTSHELL: “With incomes starting to rise a little faster, the outlook for consumer spending on everything, including housing, is brightening.”
WHAT IT MEANS: If wage pressure is the Fed’s focus of attention, then the most closely watched economic indicator should be labor compensation. Strong gains in worker income are the missing link to a robust economy and the key to the Fed raising rates. We did see some better, though not great, increases in personal income in August. Wage and salary gains, the biggie in this report, were the largest since March. The increases need to almost double the August before gain it can be said that workers will have lots of money to spend. Still, disposable income is rising and households are putting it to use. Consumption surged as people bought lots of vehicles. But the real gain came in services, which is the largest segment of the economy. There was a decline in July, likely due to the relatively mild summer reducing utility spending. A more normal August probably turned things around. Health care is also in this category and that might have played a role, but we will not really know until the third quarter GDP figures come out at the end of October. On the inflation front, the Fed still has little to fear. Prices were flat and excluding food and energy, they were up modestly. This allowed household spending power to rise strongly.
On the housing front, the National Association of Realtors reported that pending home sales eased in August. The level was the second highest in the last twelve months but was still down from August 2013. As I have mentioned before, the housing sector is going through a rotation from investor driven activity to a more normal new home buyer/homeowner powered market. This transition takes time as investors are pulling out, offsetting the increases in more traditional buyers. That activity has increased fairly consistently since bottoming in the winter, is a sign that the sector should make it out of the other side in very good shape.
MARKETS AND FED POLICY IMPLICATIONS: Friday we get the September employment report. It should be really good, but I was wrong last time so I will wait to see the number before I start accepting my forecasting award. Just kidding. I do think job gains could challenge this year’s high water mark of 304,000 set in April. I also expect the unemployment rate to come down to 6.0%. But even if I am correct, what really matters is the translation of a tighter labor market into wage gains for workers. Until that happens, there will be questions about when the Fed will move. The August income numbers provide hope that the rise in compensation is starting to occur. Adding to the belief that conditions are indeed changing, the Dallas Fed’s September Manufacturing survey found wages and salaries rising the fastest since February 2008. But we need to see those rises spread across the nation before we can conclude that workers are getting a larger share of the pie and the Fed can start taking its foot off the gas.