KEY DATA: Consumption: +0.3%; Disposable Income: +0.4%; Prices: 0%; Over-Year: +0.8%; Excluding Food and Energy (Over-Year): +1.6%
IN A NUTSHELL: “Households keep spending and hopefully businesses will follow their lead.”
WHAT IT MEANS: Atlas has some really broad shoulders. The U.S. consumer has been holding up economic growth for quite a while now and they have yet to falter. Consumption rose solidly in July, led by a surge in demand for durable goods. That was hardly a surprise, as we knew vehicle sales jumped. The robust pace posted in July will not likely be matched in August, but demand for light weight vehicles and trucks should add to growth this quarter. Demand for services was also up solidly. The one negative area was soft-goods sales and much of the decline came from a fall in prices of energy. That is already fading. Adjusting for prices, nondurable goods demand was down minimally. So far this quarter, consumption is growing at a 2.7%, which is pretty good given the huge 4.4% rise in the second quarter.
Can consumers continue to spend like crazy? Yes! Disposable income, which is what we have left after the government gets its hands on our income, rose strongly once again. Critically, there continues to be solid increases in wages and salaries. Much of that has likely come from the strong gains in payrolls rather than a rise in the income of those currently working. Still, money is money and the added funds will power spending going forward.
As for prices, inflation remained totally under control. Overall consumer costs barely budged and even over-the-year, they rose at a pace well below the Fed’s 2% target.
MARKETS AND FED POLICY IMPLICATIONS: Last week, Fed Chair Yellen pretty much made it clear the Fed would raise rates when the members were certain their expectations concerning the economy and inflation were being met and incoming data supported those views. So, how does today’s numbers fit into the Fed’s models? The same as it ever was (Yes, that was a Talking Heads lyric). The economy is in good enough shape for the Fed to increase rates. However, while the labor market is tight and wages are rising, it is not so tight that wages are soaring. And, inflation is lagging. In other words, the Fed can do whatever it wants to do. Unless we see another sharp increase in jobs in Friday’s jobs report and wage gains accelerate significantly, the Fed will not be pressured to move in September. The Fed will not know about third quarter GDP at the September 20-21 meeting. All they will have will be estimates that will not include any September data. So, a rate hike then would almost go against the members’ arguments that one number (in this case a jobs report) should drive policy. I would like them to move in September, but I still don’t believe there is a high probability that will happen, especially given the today’s mixed numbers. As for the markets, Friday’s employment release may keep people at their desks instead of getting a jump on the Labor Day weekend, but it will also keep traders cautious.