KEY DATA: Spending: +0.5%; Income: +0.5%: Prices: +0.1%/ Confidence: -0.3%/ GDP: +1% (Up from 0.7%)
IN A NUTSHELL: “With consumers spending, incomes growing and confidence stable, it is hard to understand why we are seeing all those stories about a recession on the horizon.”
WHAT IT MEANS: “The recession is coming, the recession is coming” – Really? While I may look a little like Alfred E. Neuman (not really), I don’t go around saying: “What me worry?” I do worry when there are good reasons to worry. That is not right now. It is hard for the U.S. economy to fall into recession if the consumer is spending and guess what, that is happening. Consumption was strong in January and it was across the board. Solid gains were posted for durable and nondurable goods as well as services. More importantly, households can keep up the pace, as income growth was robust. Wages and salaries are on the rise, which is what we would expect from the tight labor markets. Consumers may be spending, but the rise in incomes has been enough to keep the savings rate constant. On the inflation front, while the overall increase was not significant, a lot of that was from commodities. The cost of services, which is nearly two-thirds of consumption, continues to accelerate. The year-over-year increase in the Fed’s favorite inflation measure, the Personal Consumption Expenditure price index, was the highest in over a year. Excluding food and energy, the index was up the fastest in three years. We may still be below the Fed’s inflation target, but the target can now be seen by the eye, not just on radar.
Another reason to be optimistic is that consumer confidence is not crashing, despite the mayhem in the markets. The University of Michigan’s February reading of Consumer Sentiment did tick down, but the decline was not nearly as much as might be expected given the stock market declines. The concerns did show up in expectations, which fell sharply.
The government revised fourth quarter GDP growth up a bit. A small decline was expected, so the modestly faster growth pace was a nice surprise. The revisions were minor in most categories and don’t alter the perception that the economy eased at the end of last year.
MARKETS AND FED POLICY IMPLICATIONS: The long awaited rise in wages and salaries is starting to show up. Now, we shouldn’t expect the sharp January increase to be repeated as some of the gain came from first of the year raises. But with jobless claims low and job openings high, it is likely that the wage acceleration that has been occurring for the past three years should continue this year. With incomes rising and financial conditions improving, there is every reason to believe households will continue opening their wallets. This report provides more ammunition for those at the Fed who say that market volatility should be watched but should not be the determinate of policy. It’s the economy and inflation that matter. Growth is rebounding, inflation is picking up and stocks have recovered about half the loss posted this year. In other words, conditions are moving back toward supporting a rate hike.