KEY DATA: Consumption: +0.9%; Income: +0.5%; Inflation: +0.3%; Excluding Food and Energy: +0.1%/ Claims: +3,000
IN A NUTSHELL: “Consumers have the money to spend and they are doing just that.”
WHAT IT MEANS: Another day, another day of good economic data. Oh, I have said that before. Well, I expect to be able to say that many more times. Yes, I am poking fun at the Fed’s evaluation of the economy. There are those that look into the future who are called forecasters. There are those that evaluate current data and we call them nowcasters. And there are those that can only see the past and we call them Fed members. Enough. The good news today was the income and spending numbers. Consumers went out and bought a lot of everything in May. We knew the report would be strong because of the jump in vehicle sales. But it was not just durable goods demand that was up. Demand for nondurables was also robust and spending on services continues to be solid – even when adjusted for inflation. So far this quarter, consumption is running at a 2.5% annualized pace. A moderate June increase would get us to 3%. With services, which is two-thirds of all spending, holding up, that is a possibility even if vehicle sales fade from their ten-year high. Strong gains in income add to the belief that the consumer will continue to spend solidly. Income rose sharply and much of that increase came from gains in wages and salaries. Adjusting for inflation, disposable income for the first five months of the year is up a strong 3.6% compared to the same period last year. Consumption outstripped the strong rise in income and the savings rate eased. Inflation picked up, but
The tight labor market remains tight as new claims for unemployment insurance inched up last week. The level is at historic lows when adjusted for the labor force and that means hiring is likely to continue to be strong with wage gains accelerating as well. More firms are announcing they are raising the minimum wage they are paying their workers and as that trend spreads, even small businesses will have to follow or risk losing workers.
MARKETS AND FED POLICY IMPLICATIONS: People have the money to spend and it looks like they are actually spending it. The labor market is tight, wages and incomes are rising solidly so we should expect consumers to help lead the economy forward. I had commented that this report was the one on which I was focusing. It shows that on the consumer side, everything is good shape: Both spending and income are solid. The only issue for the Fed is inflation. While it is ticking up, the rate over the year is still well below the Fed’s target. As the declines in energy start coming out of the index, that will change and it would not be surprising if the overall index is running at a 2.5% pace by the end of the year. Excluding food and energy, though, the index doesn’t seem to have much upward momentum. Modest inflation and Greece are the only two things standing in the way of the Fed finally becoming a more positive about the current and future economy. Basically, the economy is strong enough if the Fed wants to move and the markets, especially the fixed income markets, need to start taking that into account.