KEY DATA: Spending: +1%; Disposable Income: +0.5%; Prices: +0.3%; Excluding Food and Energy: +0.2%/ Confidence: -2.1 points/ Home Prices: +0.1%; Year-over-Year: +5.2%

IN A NUTSHELL: “Consumers have the income to spend and they are doing just that, but they still don’t seem happy about things.”

WHAT IT MEANS: Watch what they do, not what they say is a good phrase to live by when it comes to consumer spending. Household financial conditions are improving as personal income rose solidly in April. Wage and salary increases were robust for the third time in four months. It finally looks like the tight labor market may be forcing businesses to pay up for workers. With the money to spend, households are out there hitting the malls, the dealerships and the dry cleaners – demand for durables, nondurable and services were all up sharply. Spending exceeded income, so the savings rate slipped. It is still reasonably high, though, indicating the households are not getting too carried away. As for prices, they rose solidly, largely on the back of strong energy price increases. However, even excluding food and energy, they were up solidly. Both the overall measure and the core index increases over-the-year will hit the Fed’s target of 2% by the fall, if they continue to rise at the same pace as they did in April.

You wouldn’t know that household financial conditions are getting better by talking to people. The Conference Board reported that consumer confidence fell in May, a surprise given the sharp rise in the University of Michigan’s Consumer Sentiment Index. The labor market is solid, wages are rising and job openings are near record highs, so people should be upbeat. Maybe it’s the thought of the next election that is getting them down, who knows? But they are not a bunch of happy campers. Views on both current and future conditions worsened and respondents worried that jobs would become more difficult to get both now and going forward.

On the housing market front, the S&P/Case-Shiller seasonally adjusted National Home Price Index rose modestly in March. Interestingly, the index of twenty large metro areas showed a much larger gain. I guess the rest of the country is not following those areas. Still, every one of those metropolitan areas, except Cleveland, posted an increase.

 MARKETS AND FED POLICY IMPLICATIONS: The consumer could push GDP growth above 3% this quarter. Consumption is already growing at a 3% rate and is likely to be higher.   Also, housing has started rebounding from its March low. A few more long security lines at strategic airports (those are ones where powerful members of Congress fly out of) and government spending just might be up sharply as well. Yet despite their actions, households are still cautious. It is hard to explain the decline in confidence that the Conference Board reported. The University of Michigan’s Sentiment Index increase better matches the changes occurring in family finances, but the divergence of the two measures makes you wonder.   But what the Fed needs to start seriously thinking about is their inflation measure. Prices are rising faster and it isn’t just gasoline. The Fed’s dual targets of full employment and trend (2%) inflation are within reach. The Fed is not likely going to wait until both measures hit or exceed their targets, which should happen in the fall. The real question is: Do they raise rates in June or July? A stronger than expected May jobs and wages report on Friday, could push them to act in June. The Verizon strike may have temporarily stunted the jobs number, so study the details even more closely than usual. Given all the uncertainty, it makes sense for investors to temporize this week.