KEY DATA: Disposable Income: -8%; Wages and Salaries: 0%; Consumption: -1.0%; Prices: +0.2%; Ex-Food and Energy: +0.1%/ Sentiment: up 8.1 points
IN A NUTSHELL: “The ebb and flow of government stimulus checks is causing havoc with the economic data, so look at the trends, not the monthly numbers.”
WHAT IT MEANS: It’s broken record time. I have written this hundreds of times, but it is important, especially now given the massive intervention in the economy by the federal government, that a single month’s numbers are not given too much importance. That was noted when the January spending and income numbers were released, and the same is true for the February data. Consider the income numbers. In January, when the money from the December stimulus bill started hitting bank accounts, disposable (after-tax) income skyrocketed 10%. Well, those checks ended in February, so income collapsed. Net-net, the gain over the two months was still a massive 2.3%. That shows how much the economy is benefitting from the December stimulus plan. Unfortunately, wage and salary gains were flat. Part of that may have been due to the weather closing businesses, so don’t read too much into that yet. Consumption also fell sharply. But that was not necessarily the consequence of fewer government checks being cashed. It was just the surge created by the inflow of funds, especially from unemployment compensation programs, allowed households to catch up in January. Spending soared by an incredible 3.4% in January, which obviously was not sustainable. With income declining greater than spending, the savings rate fell. It is still extremely high. As for inflation, it remains surprisingly tame, as prices rose moderately in February and minimally if you exclude the more volatile food and energy components. The low pace of inflation could end very soon, as the economy is really ramping up.
Households are getting good news from all directions and that is starting to show up in the confidence data. The University of Michigan’s Consumer Sentiment Index popped in March, with both the current conditions and expectations indices rising sharply. Given that money is flowing and the vaccination process is accelerating, that was hardly a surprise. Look for the confidence reports to look really good for a long time. IMPLICATIONS:They yo-yo impact of government policy on the economic data will continue and even get worse over the next few months. The stimulus checks are being mailed out, so look for income to skyrocket once again in March, fall in April and, given that it is taking time to distribute the money, probably even decline again in May. That means we have to wait until at least June before we get a handle on what is happening to the ability of households to continue spending at the breakneck pace they are doing. That is when the wage and salary numbers will start to dominate the income reports. After two months, consumption, adjusted for inflation, is expanding at a massive 6.3% annualized pace this quarter. That could accelerate, given that February’s spending may have been constrained by the weather and the warmer weather and the stimulus money will undoubtedly lead to better consumption in March. This is setting us up for a pretty strong first quarter growth rate. And that will be only the start of things. The extra unemployment benefits will run into the fall and the entire checks will not be spent right away. When you consider the reopening of the economy in the late spring and summer, and all the additional jobs and spending that will create, the second and third quarter growth rates could be really robust. I am coming around to the belief that the 6% or more growth estimates for this year could be on point. That would make it the strongest increase since the 7.2% rise in 1984.