INDICATOR: February Consumer Prices, Real Earnings and Small Business Confidence

KEY DATA: CPI: +0.2%; Over-Year: +1.5%; Ex-Food and Energy: +0.1%; Over-Year: +2.1%/ Real Earnings: +0.3%; Over-Year: +1.9%/ NFIB: +0.5 point

IN A NUTSHELL:  “Modest inflation and tight labor markets are helping drive up worker spending power, which hopefully will keep the expansion going.”

WHAT IT MEANS:  With the world economy slowing and uncertainty about trade continuing to restrain business decision making, something needs to improve if the economy is to pick up some steam.  Well, that just may be household spending power and modest inflation is helping that along.  The Consumer Price Index rose moderately in February, led by increases in energy and to a lesser extent, gains in food, apparel and shelter costs.  On the other hand, medical goods and used vehicle prices dropped sharply, as did energy services costs.  Excluding food and energy, prices rose minimally. Over the year, consumers have had to deal with very limited inflation pressures, though they increased somewhat more moderately when food and energy were taken out of the mix.  Nevertheless, there are few signs that inflation pressures are building.

Household spending power is determined by both wage gains and inflation.  Inflation is tame; Wage gains are not.  Hourly wage costs jumped in February, rising 3.4%, the fastest pace in a decade.  When inflation was factored in, the increase is pushing 2%, something we haven’t seen in four years.  Back then, inflation was largely flat. 

The National Federation of Independent Businesses reported that small business confidence is stabilizing after having been bashed by the economic slowdown and the government shutdown.  The index peaked in August and declined consistently until it edged up in February. 
A number of categories posted increases, including general business conditions and the outlook for expansion, but earnings were still weak and sales are going nowhere.  These data bounce around and the modest rise in February may not be a signal that conditions are starting to improve.  It could just be an improvement due to the government shutdown ending.  Let’s wait a couple of months to see if this was a start of an upward trend or just a temporary rebound. 

MARKETS AND FED POLICY IMPLICATIONS:  In general, the economic data have indicated that growth moderated fairly sharply at the end of the year.  The consumer really didn’t spend a lot of money and that is not good news for future growth.  But households have more money to spend and it is not being eaten away by inflation.  That implies we should be able to sustain moderate growth in the spring.  Unfortunately, there is simply nothing out there that says the economy will accelerate sharply.   It is hard to see what could give investors the green light other than a trade agreement that is much more than puff pastry.  That puts pressure on to not only get something done, but to get a real change in the terms of trade between the U.S. and China.  If we wind up with more puff than pastry, investors may exhale for a while, but reality could settle fairly quickly.  Given all the uncertainty, the Fed is likely to make believe it is the second coming of Rip Van Winkle and go to sleep for quite a while.  The members are in no rush to move (from under the covers).