KEY DATA: Consumption: +0.3%; Disposable Income: +0.5%; Inflation: 0.1%/ Sentiment: -1.2 points
IN A NUTSHELL: “Consumers continue to spend and inflation continues to be well contained; so what else is new?”
WHAT IT MEANS: The more data we get, the more we learn what we already know: The U.S. economy is in good shape but inflation remains below the Fed’s desired target rate. In other words, the Fed’s conundrum continues unabated. Household spending rose decently in July, even when you adjust it for inflation. We knew the gain would be solid since vehicle sales rebounded from a June slump. Inflation-adjusted consumption of nondurables and services improved modestly. The key services component, which constitutes about 45% of the entire economy, is up by a very good 2.8% over the year, adjusting for inflation. Consumers are not just out there borrowing money to purchase big-ticket items, they are buying everything. Can they keep it up? Yes! Income grew strongly in July as wage and salary gains improved. It appears that worker compensation is accelerating. That is critical to maintaining a near-3% growth rate. If household incomes keep ramping up, the strong spending pace we have been seeing should be maintained since balance sheets are in much better shape. While the Fed members should feel good about the economy, they will likely remain uneasy, queasy about inflation. Prices rose modestly, both overall and excluding food and energy. Over the year, the inflation rate has decelerated a touch recently. That is not a trend the FOMC wants to see.
One question being raised is whether the stock market wild ride will harm consumer confidence and spending. For now, the answer is unclear. The University of Michigan’s Consumer Sentiment Index eased a touch in August. The stock market volatility period constituted only a small portion of the survey period. Confidence changes that result from short-term market price volatility don’t necessarily lead to alterations in spending patterns. The September Mid-month sentiment snapshot comes out before the next FOMC meeting, and that will matter more.
MARKETS AND FED POLICY IMPLICATIONS: It is getting tiresome constantly talking about what the Fed will or will not do in September or even this year. That alone says the Fed has messed up its communications policy really badly. The Committee keeps trying to provide better information but the more they change the strategy, the more they don’t clarify things. Saying they are data dependent sounds good, but when analysts can change their outlook dramatically on a couple of days of stock market volatility (one large institution went from September to next March!), that doesn’t tell me the Fed’s signaling system is getting the job done. Waiting for Godot can be tiresome and I really don’t enjoy sitting around saying basically the same thing over and over again. Which I continue to do. Unfortunately, my writing will never be compared to Samuel Beckett’s. In any event, repeating what I keep saying, the U.S. economy is in very good shape, inflation is low and the Fed is perplexed – or afraid of making a mistake – or whatever. September 17th cannot come soon enough for me.