Category Archives: Income and Spending

Durable Goods Orders, Economic Indicators, Gross Domestic Product, Income and Spending, New Home Sales

Revised Third Quarter GDP, November Spending, Income, Durable Goods Orders and New Home Sales

KEY DATA: GDP: 5.0% (revised up from 3.9%)/Consumption: +0.6%; Disposable Income; +0.3%/Durable Orders: -0.7%; Private Investment: 0.0%/New Home Sales: -1.6%

IN A NUTSHELL:   “The economy boomed in the summer and while growth may have moderated during the fall, it is still moving forward solidly.”

WHAT IT MEANS:  Lots of numbers today.  Third quarter GDP growth was revised upward to its strongest rate in eleven years.  The revision was powered by a realization that consumers spent a lot more than initially thought.   There was also better business investment activity.  It is nice that both households and businesses spent aggressively during the summer, but will that be sustained?  Maybe not at 5%, but we could easily get another number at or above 3.5%.  Consumer spending surged in November after a solid gain in October.  So much for a weak Black Friday.  The gains were across the board, when you adjust for price changes.  So far this quarter, real consumption is rising at a 3.7% annualized pace and that could come in even higher.  First, people have the money to spend.  Income, adjusted for inflation and taxes, surged in November and wage and salary gains were solid.  People are spending but the savings rate is fairly stable, a sign that households are not getting ahead of themselves.  Second, confidence is rising.  The Thompson Reuters/University of Michigan Consumer Sentiment Index rose sharply in December to its highest level in nearly eight years.  Happy people make for happy shoppers.

The manufacturing sector has helped lead the way but there are questions about how strong it will be going forward.  Durable goods orders fell sharply in November and that was with a pick up in civilian aircraft demand.  The report was mixed.  There was weakness in primary and fabricated metals, computers and defense aircraft.  On the other hand, orders for computers, communications equipment and vehicles were up.  Business capital investment was flat.

Housing has been moderating for a while and that trend seems to be continuing.  New home sales fell, surprisingly, in November.  Prices are rising, but not by much.  Indeed, the 1.4% increase over the year is much less than we are seeing in the existing market.  The Federal Housing Finance Agency’s October increase came in at 5% since October 2013.

MARKETS AND FED POLICY IMPLICATIONS: Patience is a virtue but it could also be an albatross around Janet Yellen’s neck.  (I never worry about mixed metaphors.)  The key to Fed policy is economic and wage growth and boy is it clear the economy has shifted gears.  The consensus for fourth quarter growth has been about 2.5%.  With the large upward revisions to third quarter growth, I am now closer to 3.5%, down from 4%, and the spending numbers support that estimate. While housing may not add much, the real uncertainty is consumers emptying shelves and causing inventories to drop.  That would moderate fourth quarter growth but when warehouses are restocked in the first quarter, activity would accelerate.  Regardless, the economy is in very good shape, probably better than the FOMC realized when it met and when Janet Yellen said she would be patient.  The Fed may want to be patient and err on the side of too much inflation, but the strong job gains are likely to continue and lead to solid wages increases fairly soon.  The FOMC may have to move earlier than most now expect.  Investors should love today’s numbers but once they stop drinking the spiked eggnog, they may realize that strong growth pushes forward the time when the Fed removes the syringe from the markets.  But for now, it is time to celebrate.

Have a Happy and Healthy Holiday!

Economic Indicators, Income and Spending, Pending Home Sales

August Income, Spending and Pending Home Sales

KEY DATA: Consumption: +0.5%; Real Disposable Income: +0.3%; Prices: flat; Excluding Food and Energy: +0.1%/Pending Sales: -1%

IN A NUTSHELL:   “With incomes starting to rise a little faster, the outlook for consumer spending on everything, including housing, is brightening.”

WHAT IT MEANS:  If wage pressure is the Fed’s focus of attention, then the most closely watched economic indicator should be labor compensation. Strong gains in worker income are the missing link to a robust economy and the key to the Fed raising rates.  We did see some better, though not great, increases in personal income in August.  Wage and salary gains, the biggie in this report, were the largest since March.  The increases need to almost double the August before gain it can be said that workers will have lots of money to spend.  Still, disposable income is rising and households are putting it to use.  Consumption surged as people bought lots of vehicles.  But the real gain came in services, which is the largest segment of the economy.  There was a decline in July, likely due to the relatively mild summer reducing utility spending.  A more normal August probably turned things around.  Health care is also in this category and that might have played a role, but we will not really know until the third quarter GDP figures come out at the end of October.  On the inflation front, the Fed still has little to fear.  Prices were flat and excluding food and energy, they were up modestly.  This allowed household spending power to rise strongly.  

On the housing front, the National Association of Realtors reported that pending home sales eased in August.  The level was the second highest in the last twelve months but was still down from August 2013.  As I have mentioned before, the housing sector is going through a rotation from investor driven activity to a more normal new home buyer/homeowner powered market.  This transition takes time as investors are pulling out, offsetting the increases in more traditional buyers.  That activity has increased fairly consistently since bottoming in the winter, is a sign that the sector should make it out of the other side in very good shape. 

MARKETS AND FED POLICY IMPLICATIONS: Friday we get the September employment report.  It should be really good, but I was wrong last time so I will wait to see the number before I start accepting my forecasting award.  Just kidding.  I do think job gains could challenge this year’s high water mark of 304,000 set in April.  I also expect the unemployment rate to come down to 6.0%.  But even if I am correct, what really matters is the translation of a tighter labor market into wage gains for workers.  Until that happens, there will be questions about when the Fed will move.  The August income numbers provide hope that the rise in compensation is starting to occur.  Adding to the belief that conditions are indeed changing, the Dallas Fed’s September Manufacturing survey found wages and salaries rising the fastest since February 2008.  But we need to see those rises spread across the nation before we can conclude that workers are getting a larger share of the pie and the Fed can start taking its foot off the gas.

Income and Spending

July Income and Spending

KEY DATA: Inflation Adjusted Disposable Income: +0.1%; Inflation Adjusted Consumption: -0.2%

IN A NUTSHELL:  “The lack of wage gains is keeping consumers from spending more money.”

WHAT IT MEANS: The constraining cycle of minimal wage gains leading to minimal consumption increases continues.  Households saw their incomes rise modestly in July as the increase in wages and salaries was the slowest this year.  Adjusting for inflation, the rise was barely perceptible.  Real disposable personal income has increased by 2.6% over the year, enough to drive decent but not great consumer spending.  In July, households decided to go on a shopping vacation.  They spent little but some of that may be due to the relatively mild winter that reduced air conditioning needs.  Utilities are part of services spending and that component, which is two-thirds of all consumption, was flat.  Also, while vehicle sales were strong, they did not come close to the robust pace posted in June so spending on durables was off sharply.

Will consumption rebound?  The likelihood is yes as the University of Michigan’s Consumer Sentiment Index increased in August as households are more optimistic about their economic conditions.  However, they remain somewhat uncertain about the future.  A sharp rise in the Chicago Business Barometer adds to the indicators showing that the manufacturing sector is improving.  That is likely being led by better consumer spending, even if the government is not yet finding that is happening.

MARKETS AND FED POLICY IMPLICATIONS: We need better consumer spending but we cannot get it until wages actually rise.  This is the trap we are in and it is not resolving itself quickly.  Indeed, businesses remain convinced they can get the perfect candidate at the price they think they should pay despite the growing number of job openings.  The disconnect in this economy is between what an employer wants to pay and what an employer needs to pay to get the worker they want.  In the business community, which is a firm believer in the market economy, there is a belief that the labor market doesn’t follow the laws of supply and demand.  In economist’s parlance, employers think that the labor supply curve is flat so they can pay a constant price for any number of workers they want.  The high unemployment rate of the past six years allowed that concept to take hold since it was basically accurate.  But with excess labor supply diminishing, a normal shaped labor supply curve is reappearing and that means to get more workers, you have to pay more.  If you don’t, the opening will go unfilled.  Markets work, even the labor market, and while wages may be sticky downward in a recession, as we approach full employment, they will go up.  The longer businesses take to recognize that wages need to be increased, the faster they will likely rise when that recognition sets in.  On that positive note for workers let me say:

Have a safe and enjoyable Labor Day Weekend!