Goldilocks Meets Her Untimely Fate at the Hands of a Raucous Core PCE

	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

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. U.S. Construction Also Rises…March 30, 2007By Robert Brusca

	Construction Put In Place $-Millions
	Percentage Change as Noted
	1-Mo	1-Mo SAAR	3-Mo	6-MO	Yr/Yr	Share
Total	0.3%	3.3%	-9.4%	-4.8%	-2.4%	100.0%
Private	0.2%	2.6%	-18.1%	-9.5%	-6.0%	75.5%
Residential	-1.0%	-11.0%	-31.2%	-17.0%	-15.1%	48.0%
Lodging	2.6%	35.8%	46.2%	20.9%	45.4%	1.9%
Office	-0.2%	-2.1%	43.1%	19.6%	31.9%	4.5%
Commercial	1.8%	23.3%	9.2%	4.5%	8.6%	6.8%
Transport	1.6%	21.6%	24.2%	11.5%	-0.7%	0.8%
Communication	6.8%	119.4%	96.9%	40.3%	16.8%	1.6%
Power	6.2%	105.8%	-36.4%	-20.3%	6.5%	2.7%
MFG	5.0%	78.7%	6.1%	3.0%	23.1%	3.5%
Other	0.6%	7.9%	9.5%	4.6%	9.8%	5.8%
Public	0.4%	5.4%	26.0%	12.3%	10.4%	24.5%
Highway	0.5%	5.8%	7.4%	3.6%	10.9%	6.8%
Sewer	-0.2%	-3.0%	36.9%	17.0%	8.9%	1.8%
Water	-0.1%	-1.4%	-3.9%	-2.0%	6.9%	1.1%
Other	0.5%	6.7%	37.3%	17.2%	10.6%	14.8%

Construction spending in February rose by 0.3% and the drop in January was revised upward from a drop of 0.8 to one of 0.5%. In the current quarter private residential spending is off at a 19% pace. Other private spending rising at a 16% pace. Public spending is up at an 11% pace. Still, due to the size of the residential sector overall spending is dropping at a 4% pace in 2007-Q1. The chart on the left shows trends in the three main construction segments Private residential, Public and other private. These six month annualized growth rates show that nonresidential private spending is faltering, but still carrying positive growth. Private residential spending is stabilizing but still sinking at a steady 19% annualized rate of decline. Public spending is oscillating and growing at about a 12% pace.

We've been talking about the improving economic conditions in Europe, and today the EC reported still more evidence. On a day when US consumer sentiment was reported to be down again, that in Europe improved, and the overall "sentiment indicator", which includes separate readings for various business sectors, gained 1.5 points to 111.2, the highest reading since January 2001. This index is based on a long-term average set at 100, so this reading is 11.2% "higher than average".

All the sectors contributed to the increase, although construction barely moved, going to 0.2 from 0.0 (these are "percent balance" measures, the percent of respondents with better conditions less that with worsening conditions). More distinctive changes came in industry, which increased from +5.4 in February to +6.1 in March. This reading ties with last November as the highest in the history of the survey, which runs back to 1985. Service businesses' confidence increased to 22.3 for March from 19.6 in February. Sentiment here has run much stronger than in other areas, with readings up in the 30's during the pre-2000 tech boom, so high as 22.3 sounds, it is not relatively as strong as other sectors. Retail trade moved to 0.0 from -1.1, but it had been above zero during much of 2006.

Consumer confidence remains negative at -4.4, but this is still the best level since the spring of 2001. People see the general economic situation as improving, unemployment declining and their own financial prospects also getting better. The only component of consumer confidence not moving favorably is planned savings, which dipped 0.2 to -7.8.

The unemployment situation as perceived by consumers runs close to the actual unemployment experience. That figure was reported today as well, for February. The harmonized rate for the Euro-zone EA13 edged down from 7.4% to 7.3%, the lowest in the 11-year history of these data. In fact, last November, the rate reached 7.6%, the first time it had been below 7.7%. And it's still improving.

EA13 Business & Consumer Sentiment, SA	Mar 2007	Feb 2007	Jan 2007	Year Ago	2006	2005	2004
Economic Sentiment Indicator (LT Avg = 100)	111.2	109.7	109.2	103.5	106.9	97.9	99.2
Industry (% Balance)	6.1*	5.4	5.4	-0.7	2.3	-7.3	-4.7
Services (% Balance)	22.3	19.6	19.6	14.5	18.1	11.1	10.6
Consumers (% Balance)	-4.4	-4.8	-6.5	-11.0	-9.0	-13.8	-13.9
Unemployment Rate (%)	--	7.3*	7.4	8.2	7.9	8.6	8.8

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

Construction Put In Place $-Millions

	Percentage Change as Noted
	1-Mo	1-Mo SAAR	3-Mo	6-MO	Yr/Yr	Share
Total	0.3%	3.3%	-9.4%	-4.8%	-2.4%	100.0%
Private	0.2%	2.6%	-18.1%	-9.5%	-6.0%	75.5%
Residential	-1.0%	-11.0%	-31.2%	-17.0%	-15.1%	48.0%
Lodging	2.6%	35.8%	46.2%	20.9%	45.4%	1.9%
Office	-0.2%	-2.1%	43.1%	19.6%	31.9%	4.5%
Commercial	1.8%	23.3%	9.2%	4.5%	8.6%	6.8%
Transport	1.6%	21.6%	24.2%	11.5%	-0.7%	0.8%
Communication	6.8%	119.4%	96.9%	40.3%	16.8%	1.6%
Power	6.2%	105.8%	-36.4%	-20.3%	6.5%	2.7%
MFG	5.0%	78.7%	6.1%	3.0%	23.1%	3.5%
Other	0.6%	7.9%	9.5%	4.6%	9.8%	5.8%
Public	0.4%	5.4%	26.0%	12.3%	10.4%	24.5%
Highway	0.5%	5.8%	7.4%	3.6%	10.9%	6.8%
Sewer	-0.2%	-3.0%	36.9%	17.0%	8.9%	1.8%
Water	-0.1%	-1.4%	-3.9%	-2.0%	6.9%	1.1%
Other	0.5%	6.7%	37.3%	17.2%	10.6%	14.8%

EA13 Business & Consumer Sentiment, SA	Mar 2007	Feb 2007	Jan 2007	Year Ago	2006	2005	2004
Economic Sentiment Indicator   (LT Avg = 100)	111.2	109.7	109.2	103.5	106.9	97.9	99.2
Industry (% Balance)	6.1*	5.4	5.4	-0.7	2.3	-7.3	-4.7
Services (% Balance)	22.3	19.6	19.6	14.5	18.1	11.1	10.6
Consumers (% Balance)	-4.4	-4.8	-6.5	-11.0	-9.0	-13.8	-13.9
Unemployment Rate (%)	--	7.3*	7.4	8.2	7.9	8.6	8.8