KEY DATA: Consumption: +0.4%; Income: +0.5%; Prices: +0.2%; Ex-Food and Energy: +0.2%/ Sentiment: -1.8 points

IN A NUTSHELL:  “Decent income gains are supporting continued consumer spending, but weakness in wage increases remains a threat to growth.”

WHAT IT MEANS:  Until the trade wars are resolved, businesses will remain under pressure, so we have to look at consumers to keep things going.  And it looks like that is happening.  Household spending jumped in May, led by a surge in vehicle sales.  Services demand also was up solidly, which overcame weakness in soft goods purchases.  Still, the increase in spending, when added to the rise in April, means that second quarter consumption should be solid if not strong.  Of course, that depends upon June vehicle sales and we will not know them until next week.  Can households continue to spend?  That is a good question.  On the surface, the answer is yes, as disposable (after tax) income rose strongly.  But wage and salary gains were tepid, at best.  Workers did not see a whole lot of increase in their paychecks and that is worrisome.  Proprietors’ income jumped and interest payments surged (don’t ask me why, I have no idea), creating the strong income increase.  The savings rate was up again, possibly indicating that households are becoming more conservative in their spending patterns.  As for inflation, it rose moderately even when the volatile food and energy components (the core rate) were removed.  Over the year, price gains remain below the Fed’s 2% target.

Consumer confidence continues to fade, but by no means can it be said that people are depressed.  The University of Michigan’s Consumer Sentiment Index eased in June less than expected.  The overall measure remains quite high as do the current conditions and expectations indices.  The report noted that: “June’s small overall decline was entirely due to households with incomes in the top third of the distribution, who more frequently mentioned the negative impact of tariffs”.  That is not likely to lead to much of a change in overall spending.MARKETS AND FED POLICY IMPLICATIONS:We are on Fed Watch.  Will the FOMC cut rates at the next meeting, that end July 31st?   The markets still seem totally convinced that it will happen, but I am not.  Consumer spending is holding up and that means second quarter growth could come in at around 2%.  The Fed raised rates when the economy was expanding not much more than 2%, so why should 2% growth require a rate cut?  Keep in mind, most economists believed and still do that 3% growth is not sustainable and we would ease back to trend, which is in the 2% range.  As for inflation, which seems to worry the Fed as much or more than growth, it too is not really falling apart.  On a quarter-over-quarter annualized basis, top line inflation is running at a 2.3% annualized pace while core inflation is more muted, at 1.7%.  While the year-over-year numbers are both below 2%, the Fed should also be looking at the recent pattern.  If the quarter-over-quarter rates are near the Fed’s target, wouldn’t it be reasonable to remain patient and see what happens?  Growth around 2% and inflation just below 2% are not data points that demand a rate cut.  If we get one, my conclusion would be that it’s the equity markets that matter the most right now.  That would imply the Fed has a triple mandate that includes maximizing equity values, not just maximizing employment and stabilizing inflation.  Ugh!