KEY DATA: Consumption: +0.1%; Income: +0.4%; Prices, Ex-Food and Energy (Over-Year): +1.8%/ Orders: +0.2%; Ex-Aircraft: +0.5%; Capital Spending: -0.2%/ Sentiment: +3.4 points
IN A NUTSHELL: “Households have the money to spend, but it isn’t clear they will continue spending it at a robust pace.”
WHAT IT MEANS: The broad shoulders of the consumer keeps bulking up on growing income, but they still need to spend it and in August at least, that didn’t happen at a very solid pace. Consumption rose modestly in despite strong durable goods demand. Nondurable purchases were soft while services, which make up about two-thirds of all spending, rose moderately. In addition, the robust July gain, was revised downward a touch. Will spending rebound? If income is the driver, the answer is yes. Wages soared in August. They had slowed in July, which was likely an aberration. The combination of strong income gains and modest spending led to a rise in the savings rate. Households are stashing funds away for a rainy day. On the inflation front, overall prices went nowhere. Excluding food and energy they rose modestly, but over the year, the increase is approaching the Fed’s 2% target.
As for businesses, durable goods demand rose solidly, if you exclude aircraft. But the key figure in this report is the capital spending number and that was down. That was not expected and it speaks to the high level of uncertainty gripping corporate leaders. Backlogs rose a little, but nothing to lead one to believe that production will surge anytime soon.
Looking forward, consumer attitudes will play a large role in the extent to which growth slows. The Conference Board reported earlier this week that confidence cratered in September. However, the University of Michigan’s Consumer Sentiment Index ticked up during the month. Still, all is not good in consumer land. As the report noted: “Despite the high levels of confidence, consumers have also expressed rising levels of economic uncertainty.” Political issues don’t usually have a lasting impact on household spending, but fears about jobs or incomes do. So we need to watch this carefully.MARKETS AND FED POLICY IMPLICATIONS:Chair Powell needs some data to fight off the insurrection that seems to be building at the Fed. Today’s data only muddies the waters. Income is solid but spending may be moderating. Businesses are not investing but given the rise in durable goods orders, manufacturing doesn’t look to be falling apart. We seem to be on track for another roughly 2% GDP gain for the third quarter, which may seem bad but it is trend growth. And the Fed’s inflation figure, if you consider the non-food and energy number, is nearly at target. Next week we get the September employment report and I suspect it will be decent but not great as well. That is, it will signal even more 2% growth. So, what will the Fed do? I have it sitting tight until it sees that there really is a downturn brewing. Right now, that is not the case, even if the risks remain to the downside. Actually, the risks could be rising. No one knows how the president will react to the impeachment process, but if he lashes out by raising tariffs to show he is boss, then we could be in real trouble. But that is conjecture, which is really all we have to go on right now.