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March 28, 2016 | Consumer Spending Outlook Buckles with “Surprisingly Weak” Income Report

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Those trumping up the notion consumer spending would pick up in the first quarter were in for a surprise today.

The BEA report on Personal Income and Outlays was anything but strong.

Bloomberg Econoday found today’s report “surprising”.

The Econoday economist’s consensus reading for February was 0.1%, with the actual report coming in better at 0.2%.

The surprise was January took a nosedive from an initial report of +0.5% down to +0.1%.

Highlights

The outlook for the consumer has buckled, at least a bit following a surprisingly weak personal income and spending report for February. Income rose a soft 0.2 percent with wages & salaries slipping 0.1 percent. But the worst news comes from the spending part of the report, up only 0.1 percent and with January revised sharply lower, now also at 0.1 percent vs an initial jump of 0.5 percent.

And, in what will also push back chances for an April FOMC rate hike, inflation data are on the soft with the core PCE up only 0.1 percent and the year-on-year rate unchanged at 1.7 percent and no closer to the Fed’s 2 percent goal. Overall prices are down 0.1 percent with the year-on-year rate at plus 1.0 percent.

Turning back to income, the fall in wages & salaries is the first since September last year but was offset in part by a rise in disposable income that reflected gains for both income transfers and rental income. And consumers continued to put money in the back as the savings rate, in perhaps a sign of consumer defensiveness, rose 1 tenth to 5.4 percent for a 3-year high.

The downward revision to January retail sales to minus 0.4 percent from an initial plus 0.2 percent (posted at mid-month) swept January spending in this report likewise lower. Both durable goods and non-durable goods now show contractions in the month with growth in service spending pulled lower. Data for February are also soft with spending on non-durable goods down sharply on lower fuel prices and with spending on durable goods and services little changed.

GDP estimates for the first quarter will not be going up following this report and estimates for the second quarter and beyond may be coming down. The lack of wage gains, together perhaps with softness in home appreciation, may be holding back the consumer more than thought. This report points squarely at weakness, weakness for what is the core itself of the U.S. economy.

Recent History

The Federal Reserve’s 2 percent line is centered on the core PCE price index which is expected, helped by another gain for core consumer prices, to rise a monthly 0.2 percent in February. The gain could put the year-on-year rate, at plus 1.7 percent in January, within striking distance of the Fed’s target. But wages eased in the employment report for February and do not point to much strength for personal income which is expected to rise only 0.1 percent. Personal spending, despite a gain for core retail sales, isn’t expected to show much life either in February, at a consensus plus 0.1 percent. A weak showing for personal spending, in contrast to a rise in the core price index, would not raise chances for an April FOMC hike.

There’s Econoday back it again promoting the silly notion there was some semblance of a chance the Fed would hike this month.

Econoday was trumping up this idea even before Atlanta Fed president Dennis Lockhart stuck his foot in his mouth on March 21.

In his speech, Lockhart cited “sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April.”

For my comments on Lockhart’s speech, please see Kaleidoscope Eyes.

This report puts the economy on a recession track.

Mike “Mish” Shedlock

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March 28th, 2016

Posted In: Mish Talk

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