KEY DATA: Consumption: +0.4%; Disposable Income: +0.2%; Prices: +0.2%/ Pending Sales: -3.7%

IN A NUTSHELL: “The consumer is back spending and that should lead to solid second quarter growth.”

WHAT IT MEANS: You can talk about Brexit and the Fed all you like, but what really matters is how much households spend and it looks like they are shopping ‘till they’re tired again. Consumption rose solidly in May after surging in April. Importantly, it wasn’t vehicle sales that drove the increases. Yes, sales of durable goods were up nicely, but the increases in services and nondurables were even faster. In other words, people are out buying everything. And they have the money to spend. Disposable income rose moderately, which was good news given the weakness in hiring. Wage gains were less than stellar, a reflection of May’s modest increase in payrolls. With income expanding slower than consumption, the savings rate fell. One of the reasons that consumption was soft in the first quarter was that people decided to save at an elevated pace. This quarter, the savings rate is closer to what we have seen over the recent past few years. So, I am not worried about the decline in the savings rate. Instead, I am cheering the possibility that second quarter consumption could come in at between 3.5% and 4%, which would get me to my forecasted GDP growth rate of over 3%. Inflation remains below the Fed’s target as prices, whether food and energy is included or excluded, rose moderately. Over the year, overall prices were up just 0.9% while core prices rose just 1.6%.

On the housing front, pending home sales dropped sharply, according to the National Association of Realtors. The year-over-year change was negative for the first time in almost two years. There were declines in every region of the country. But the fall off may not be a signal that the housing market is faltering. Home sales have been solid but inventory remains limited. What we may be seeing is not a lack of demand but a lack of supply, as homebuyers cannot find the house they want to purchase. The continued rise in prices indicates that is likely the case.

MARKETS AND FED POLICY IMPLICATIONS: Brexit may be fun to talk about but its impact on the economy may be minimal, especially if the rebound in the equity markets continues. What it is also doing is driving more capital into the U.S. and that is lowering interest rates. The 10-year note is nearing all-time lows, which should lead to lower mortgage rates and maybe even more refinancing. And that could add to spending. But the Fed is in turtle mode again, hunkering down until the impact of Brexit is clearer and watching to see if the job slowdown was just a data oddity. Even if GDP expands by my 3.5% forecast and the unemployment rate remains near 4.7%, the Fed is not likely to do anything at the July meeting. Chair Yellen will probably want to see several months of solid job gains and rising wages before she pops her head out of her shell and starts thinking of moving again. That could be September, but given her propensity to react to any and every short-term shock to the system, who knows when the FOMC will raise rates again.