Sorry for the lack of updates today, but I am swamped. Some important data on personal consumption and incomes was released this morning. Bondsquawk has a good overview of the data:
“Personal consumption spending rose 0.7% in February, a little above consensus expectations, while income grew just 0.3%, a little below consensus forecasts. The combination led the personal saving rate to dip to 5.8% from 6.1%, still an elevated pace by historical standards. Most of the increased spending came from higher prices, and real spending expanded 0.3% after a flat reading a month prior. On a 3-month annualized basis consumer spending rose 2.1% through February, about half the pace seen at the end of Q4 as consumers absorb the blow from rising prices.
Wage and salary growth was relatively sluggish in February reflecting the subdued gains in hours worked and average hourly earnings. Taking inflation into account real disposable income actually fell 0.1% in February. Economists expect the March employment report to feature a healthier increase in take home pay although headline inflation will continue to tax away some of those gains. Core consumer prices rose 0.2%, as expected, leading the annual pace to tick up to 0.9% from the record low 0.8% recorded over the past two months. This is still well below the Fed’s comfort zone and so there is plenty of room for the Fed to remain accommodative. On balance the report is a mixed bag of news highlighting that rising prices are taking some steam out of recent momentum, but consumers remain on a moderate track of spending growth and continue to save at elevated rates”
Bill at Calculated Risk thinks this could be enough to warrant some downgrades in Q1 GDP (see here).
Econoday says the data is sufficient for continued growth and all in all not worrisome:
“For the latest month, consumers went on a bit of a spending spree-although a big part of it was on autos and gasoline. Income also was up nicely though an important issue is that it lagged inflation. Personal income in February advanced 0.3 percent, following a 1.2 percent advance the prior month. February’s number fell short of analysts’ forecast for 0.4 percent. Wages & salaries gained a moderately healthy 0.3 percent, matching the rise in January.
Again, consumer spending in February was led by auto sales and higher gasoline prices. Personal consumption expenditures jumped 0.7 percent, following a 0.3 percent rise in January. The latest figure beat the median forecast for a 0.6 percent gain.
For PCEs in February, strength was led by durables, up 1.6 percent, after a 0.3 percent rise in January. For the latest month, nondurables (includes gasoline) jumped 1.4 percent, following a 1.0 percent rise in January. Services spending nudged up 0.2 percent after no change the month before. Despite some erosion from inflation, real purchases were up as chained dollar purchases advanced 0.3 percent in February after no change the prior month.
On the inflation front, the PCE price index increased a notably warm 0.4 percent, topping the 0.3 percent boost in January. The core rate gained 0.2 percent in February, matching the prior month’s pace and equaling expectations. On a year-ago basis, headline PCE prices are up 1.6 percent in February-up notably from 1.2 percent the month before. Core inflation nudged up to a 0.9 percent year-on-year pace versus 0.8 percent in January.
Year on year, personal income for February was up 5.1 percent, compared to 4.9 percent in January. PCEs growth improved to 4.1 percent from 3.9 percent the month before.
The consumer sector is doing fine other than the worry about inflation eroding spending power. Income and spending numbers have been a little volatile lately but over the last two months both have been relatively strong. But for the consumer sector to keep contributing to lifting the recovery, inflation is going to have to soften and/or income will need to pick up the pace-which is not likely until employment strengthens. It’s not rocket science, but economists will be tracking oil prices and employment to judge the pending health of the recovery.”
Source: Bondsquawk, Calculated Risk, Econoday
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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