KEY DATA: Consumption: +0.1%; Disposable Income: +0.2%; Prices: -0.1%; Excluding Food and Energy: +0.1%/ Pending Sales: +3.5%
IN A NUTSHELL: “Despite having the money to spend, households seem to be dispensing it using an eye-dropper.”
WHAT IT MEANS: To spend or not to spend, that is the question and it doesn’t seem that consumers are coming down on the side of spending with any gusto. Consumption rose modestly in February and the huge gain initially estimated for January disappeared into a similarly modest rise. The problem area was nondurable goods, which includes gasoline. Adjusting for inflation, spending was up more moderately, though not spectacularly. Purchases of services were strong, which is good news since that segment comprises about two-thirds of consumption. Households are not hurting for cash, though the February income report was odd. There was a very decent increase in income, adjusted for taxes and inflation. However, wages and salaries declined. That happened despite robust job gains. An exceptionally strong increase in January was probably followed by a more normal February and the seasonal adjustments didn’t like that. Don’t be surprised if wages and salaries rebound solidly in March. As for inflation, prices were tame. Excluding food and energy the increase also seemed to be modest. The core index actually rose 0.1494%, which was reported as up just 0.1%. Had it risen by another 0.0006% (six ten-thousandth of a percent), the headline would have read up 0.2%, which would have been viewed as another solid gain. Understanding the data requires a lot more than looking at the headline number. For the year, overall prices rose a modest 1% but the “core” was up 1.7%, which isn’t that far from the Fed’s 2% target.
On the housing front, the National Association of Realtors Pending Home Sales index, which reflects signed contracts, rose strongly in February. It was down in January. The Midwest led the way with the South and West also posting increases. There was a modest decline in the Northeast. Still, the minimal increase over the year points to a sluggish housing market.
MARKETS AND FED POLICY IMPLICATIONS: Recent Fed member comments are driving home the message that the U.S. economy is in decent shape but the world economy is uncertain and inflation remains too low. Today’s reports will not change that view. The Fed is in a bind. The economy is solid enough that looking at it on its own, and the trend in inflation, conditions have been largely met to raise rates further. But negative world interest rates are driving capital into the U.S., keeping mid and long-term rates down and putting upward pressure on the dollar. Increasing rates could exacerbate those trends. So what would force the Fed’s hand? Rising Inflation. Chair Yellen believes the recent acceleration in core prices was driven by temporary factors. There are two more reports before the June FOMC meeting and if her expectations were wrong, then she might have to modify her stand. As for the markets, the pathway forward is even more confusing. Investors have to consider Fed speeches, job growth, wage and price gains, the dollar, oil, world growth, terrorism and whether Villanova can actually win it all. (Okay, maybe not the last one as they can win it all.) In other words, look for choppy markets going forward.