KEY DATA: Consumption: 0%; Income: +0.4%/ ISM (Manufacturing): +1.3 points; Orders: +2.3 points; Employment: +3.4 points/ Construction: +2.2%;

IN A NUTSHELL: “Despite continuing consumer cautiousness, the manufacturing sector is pulling out of its winter hibernation.”

WHAT IT MEANS: To spend or not to spend, that seems to be the question that is puzzling households right now. It is not as if they don’t have the money. Disposable (after tax) personal income rose solidly in April, even after adjusting for inflation. On a year-over-year basis, real income has grown by 2.4% or more for the past six months, the best stretch since 2006. In April, that increase was 3.5%, which is pretty decent. I am not saying that income growth is great, but it is no longer weak. The problem, though, is that wage gains have not been spectacular and workers have decided to save much of the gain. The savings rate rose to 5.6% and has averaged 5.4% this year. That is about one percentage point higher than during the expansion in the 2000s, which helps explain the sluggish nature of growth. In April, spending was essentially flat. A sharp drop in durable goods consumption and small decline in nondurable purchases offset a modest rise in services demand. We get May vehicle sales tomorrow so we will know if the sluggishness in that segment of the economy continued or, as expected, has turned around.

One sector that looks to have picked up some steam is manufacturing. The Institute for Supply Management’s May manufacturing index rose nicely and for all the right reasons: Orders rose strongly, hiring picked up solidly and order books started filling again. Production grew at a slower pace, but it is still expanding decently. The increasing demand and backlogs should lead to a rise in output soon. Fourteen of eighteen industries expanded and only one, petroleum and coal, said that orders fell. In other words, we are looking at a broad based improvement.

Another sign that the economic lethargy we saw in the first quarter is fading was a sharp rise in construction activity in April. Public and private, residential and nonresidential, all posted strong increases. It looks like the huge decline in energy sector spending may have ended.

MARKETS AND FED POLICY IMPLICATIONS: Incomes are growing, the manufacturing sector is coming back and construction is on the rise, so why am I not enthused about today’s data? Because we continue to see consumers holding back. Second quarter consumption growth is not off to a great start and we need a major pick up in shopping if growth is to beat expectations. The May vehicle sales numbers will be one sign, but until households get back online and start visiting the malls, economic growth will remain subdued. I still hold out hope we will get stronger growth but I am not sure many others share that belief. Investors have to start realizing that it is a robust economy, even if that means higher interest rates, which will support higher equity prices. I am not sure many share that view either.