KEY DATA: Consumption: +0.1%; Disposable Income: +0.3%; Prices: +0.1%/ Confidence: +0.6 point
IN A NUTSHELL: “Despite high levels of confidence, the consumer has become cautious and that does not bode well for growth.”
WHAT IT MEANS: It is hard to grow the economy strongly if people don’t go out and spend and that appears to be the case so far this year. Consumption barely budged in February and when adjusted for price increases, it went nowhere. That comes on top of a decline in price-adjusted spending in January. Demand for both durables and nondurable goods was soft while the increase in spending on services was modest. In other words, we didn’t buy a whole lot of anything. This cautiousness is not being driven by terribly weak income gains. Disposable income, which excludes taxes, increased moderately. Even adjusting for inflation, income was up at an acceptable pace. Wages and salaries are rising decently, which should make people happy.
One thing is certain; the failure to spend is not due to consumers being depressed. While the University of Michigan’s Consumer Sentiment Index rose less than expected, it is still at a pretty high level. Unfortunately, the political divide remains as wide as ever. As the report notes, “Democrats expect an imminent recession, higher unemployment, lower income gains, and more rapid inflation, while Republicans anticipate a new era of robust growth in incomes, job prospects, and lower inflation.” Either the sky is falling or happy days are here again. The reality is neither and that may be why spending is soft. The point is that with politics driving perceptions, the consumer confidence numbers are not likely to tell us much, if anything, about spending.
MARKETS AND FED POLICY IMPLICATIONS: People have the money to spend and are confident, but they are just not going out and opening their wallets. So far this quarter, consumption is largely flat and since we are talking about two-thirds of the economy, it is hard to see how growth can be anything but disappointing. The Blue Chip consensus is 1.7%, which is below the 2.1% posted in the final quarter of 2016. And the forecasts are trending downward. Today’s consumption number may make it really hard to even get to that pace. Adding to the uncertainty are the implications of the collapse of the AHCA. What has been lost in the gloating and recriminations is that optics matter. If there is to be progress on tax reform, the most important elements of the proposals have to pass muster with the public. Otherwise that plan could be doomed to failure as well. And an inability to pass a comprehensive tax reform package would likely have significant implications for the stock markets, the Republican party and, of course, the administration. It might also call into question the ability of the Fed to raise rates as predicted. The Obamacare repeal failure places a lot in jeopardy and ups the stakes to get the tax cuts done. It should be an interesting spring and summer, as the Republican leadership has indicated they hope to get a tax cut plan through by August.