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Economy in Brief

Goldilocks Meets Her Untimely Fate at the Hands of a Raucous Core PCE
by Robert Brusca March 30, 2007

Consumer Spending And Income TrendsStart of Q4
Percentage changes at annualized rates: various horizons
Inflation-adjustedOne monthThree monthsSix monthsOne YearQ1/Q4Oct/Q3
Durable Goods-1.2%6.9%7.5%5.3%9.2%5.3%
Nondurable Goods-5.0%2.0%4.0%2.5%3.1%-0.5%
Consumer Income
Real DPI1.7%3.4%4.9%2.6%4.0%--
Per Capita1.0%2.6%3.9%1.6%----
Memo:Feb.07Three-MosSix-MosOne-Year ----
Savings Rate (Pct)-1.2-1.3-1.2-1.2 ----

The headline numbers showed a 0.6% m/m rise in spending and income. The inflation-adjusted spending rose 0.2% (2.4% annualized real spending is not bad). But the core PCE deflator, up by 0.3% (actually 0.33124; this compounds to 4.048% in all its digital glory) has become a problem.

Ok, the Fed did say that inflation was the greater risk (right-o, on that one). But when it came to the policy statement the Fed went dead neutral on us saying policy would depend on incoming data. Well, here it is.

The table above shows the spending trends. And while the current month shows weakness in durables and nondurables, that was swamped by STRENGTH in services spending. Services is the stealth portion of the US Economy. Yeah 80% of us work in the sector but no one really surveys us. We are battered each month by manufacturing reports, surveys and innuendo. But the services sector lays low until the PCE report (but that only has only consumer services); services also emerge each month in the ISM Nonmanufacturing index (but that mixes them other nonmfg like mining and construction) and in the payroll report (but that is just jobs, not output).

We do see the ongoing IMPACT of services during the month in the weekly jobless claims and consumer confidence numbers but there is no way to isolate a services component. Suffice it to say that the strength we see in spending is a surprise. Spending strength in Q1 2007 has two sources. The first source is services as just mentioned. The second is a legacy from Q4 that back-loaded so much spending into the month of December that it has helped to boost the level of spending in Q1 compared to the Q4 AVERAGE. That comparison is the key. It is why the quarter to date Real PCE reading is probably a surprise to you with growth at 3.9%.Time to carpet the ceiling?

The chart below shows the Year/Year growth in the CPI and the PCE cores. These indexes have different methods and weights but they are both DOING THE SAME THING. Well, INFLATION is a generalized and ongoing increase in prices, so I guess if you REALLY HAVE IT, it doesn’t matter which index you look at. AND I guess we really have it.

Is it too late for the PCE-flu vaccine? A simple perusal of the data (see the chart on the left) shows the PCE deflator skimming along the ceiling (did I say ceiling?) at a pace of 2%, plus or plus more. Now - don’t hold me to this - but if you look at the chart 2% looks suspiciously like a FLOOR not a ceiling for the PCE. You might carpet the floor but never the ceiling, what is the Fed up to? The Fed no sooner waters down its anti-inflation policy directive than inflation really does appear! What timing! Makes me wonder how Barney Frank feels after rubbing the Fed’s nose in its own statement of forecast and risk. Looks like the Fed got it both right and wrong (right risk; wrong policy sentence). For those who have forgotten, the policy portion of the Fed’s March statement is reproduced below. It has two parts, one that warns of the inflation risk (underlined) and another sentence that says the Fed is braced to do nothing about it (depends the evolution of...yadda, yadda, yadda)In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Looking at trends the economy seems on a more even keel that we might have thought. The other chart on the left shows that the simple Year/Year growth in spending is pretty stable (minor downward trend). And DPI (disposable personal income) is in a slow decay as well but not much different from stable. Income trends have rebounded from their contracting ways in early 2005. But the savings rate remains negative without any sign of change. Thus consumer spending is better underpinned by income growth than it was (still not fully, however, since sending growth is faster than income growth). And spending itself is reasonably firm with growth around 2%.

It’s a better picture than we thought we would have.

Commentary Archive

Consumer Spending And Income Trends
  Start of Q4
Percentage changes at annualized rates: various horizons
Inflation-adjusted One month Three months Six months One Year Q1/Q4 Oct/Q3
Consumption 2.1% 3.6% 4.2% 3.2% 3.9% 3.2%
Goods -3.7% 3.7% 5.2% 3.4% 5.1% 1.4%
Durable Goods -1.2% 6.9% 7.5% 5.3% 9.2% 5.3%
Nondurable Goods -5.0% 2.0% 4.0% 2.5% 3.1% -0.5%
Services 6.2% 3.8% 3.6% 3.2% 3.3% 4.7%
Consumer Income            
Real DPI 1.7% 3.4% 4.9% 2.6% 4.0% --
Per Capita 1.0% 2.6% 3.9% 1.6% -- --
Memo: Feb.07 Three-Mos Six-Mos One-Year -- --
Savings Rate (Pct) -1.2 -1.3 -1.2 -1.2 -- --

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