Naroff Economic Advisors — February Spending and Income

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff, President and Chief Economist

INDICATOR: February Spending and Income

KEY DATA: Consumption: +0.8%; Inflation Adjusted: +0.5%; Disposable Income: 0.2%; Inflation Adjusted: -0.1%

IN A NUTSHELL: “Households are raiding their piggy banks to support their buying habits.”

WHAT IT MEANS: With gasoline prices near or above the $4.00 a gallon level, worries are that spending will slow.  That happened in 2008 and 2011, the other times we passed that dreaded barrier.  So far, that is not happening. Households are shopping till they’re tired once again, helped along by an improving labor market that is causing confidence to rise.

Consumption rose at a robust pace in February and it was not just for gasoline.  Spending was up across the board but most importantly for services.  This component, which makes up about two-thirds of consumption, had been going nowhere.  Whether the surge posted in February is a one-month wonder or the beginning of a trend is hard to say, but I will take it for now.   With the January spending numbers revised upward, it looks like consumption could be robust during the first quarter of the year.

Whether that will be sustained is a real question.  Incomes are rising at a slower pace than spending.  There were some decent gains in wages and salaries, but nothing near what is needed to sustain the current shopping spree.  Adjusting for inflation, disposable income was actually down, not a good trend.  As a consequence, the savings rate fell to 3.7%, a rate we haven’t seen since August 2009.

MARKETS AND FED POLICY IMPLICATIONS: This was a good report that also contained a warning. While households want to spend and will raid their bank accounts to support that habit, unless income gains start improving consumption will have to slow.  Of course, the need for wages and salaries to rise faster so that demand can improve is an issue I have been discussing for a very long time.  The improving job market may be starting to resolve the tension between controlling labor costs and paying the income needed to generate strong increases in demand.

A better economy allows for rising wages and that triggers growing demand which improves hiring and wages. That leads to further increases in confidence and we did see today that the University of Michigan’s index was up in March.  Consumption during the first two months of this quarter is running well above estimates. I suspect most other forecasters will be joining me out on my limb and revising upward their first quarter forecasts. I have been expecting growth to be closer to 3% while the consensus is about 2.5%.

The prospect that first quarter growth will not be as modest as currently predicted should buoy investor confidence.  As for the Fed, another 3% quarter would raise more questions about its target date for tightening of mid-2014.  I have it happening by the end of next year and this report only adds to that belief. Even if that happens, though, rates would still remain low for a very long time.

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RE/MAX Connection Realtors is not a licensed financial advisor and is not providing any financial advice. You should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors only is providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.

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October New Home Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: October New Home Sales
KEY DATA: Sales: +1.3%; Median Prices (Sept-Oct): -0.5%; Prices (Oct ’10-Oct ’11)): +4.0%

IN A NUTSHELL: “The new home market remains in the doldrums.”

WHAT IT MEANS: Yes, new home sales rose in October but that is about all you can say about this report. First, the level of demand is miniscule. Think about it, only 25,000 newly constructed houses are being are being purchased each month. Second, the September sales rate was revised downward, not a trend you like to see. At least there were a couple areas around the country, the Midwest and West, where builders did see a strong pick-up in sales. But the Northeast was flat and there was a sharp decline in the South. Total sales for the first ten months of the year are down nearly 7% compared to 2010 levels. As for prices, they eased a touch over the month but were up quite nicely when compared a year ago. Builders are competing with distressed houses so they have to keep prices quite low. Builders continue to do a good job of controlling inventories so demand and supply are being kept relatively in balance.

MARKETS AND FED POLICY IMPLICATIONS: Housing has been adding a little to growth this year and that is likely to continue. But the operative word in that sentence is “little”. The huge bump in jobs, income and GDP that we usually get from a rebounding housing market is not likely to be seen for quite a long time so don’t expect overall growth to be great over the next year. Still, there really is no place to go but up so we can also count on housing to be a positive not a negative in the overall scheme of things. As for the markets, the story is the consumer and the apparently robust increase in sales during the “Black Friday” weekend. With today being “Cyber Monday”, it will be interesting to see how demand holds up. With discounts really high, earnings may not be spectacular but when it comes to the economy, it is all about the number of goods bought, not the dollar value so if people spent more on discounted products, that means consumption should be up sharply. This week we get the employment report so after the euphoria of open-wallets eases, we will get back to the most important economic indicator, jobs. The November payroll gains should be a lot better than the initially reported 80,000 rise in October. There could be a decline in the unemployment rate and an ‘8’ handle would be nice to see again.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

July Employment Report

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: July Employment Report
KEY DATA: Payrolls: 117,000; Private Sector: 154,000; State and Local Governments: -39,000; Unemployment Rate: 9.1% (down 0.1 percentage point)

IN A NUTSHELL: “You can tell how worried people are when 117,000 new jobs actually look like a good report.”

WHAT IT MEANS: The reports of the death of the recovery appear to be quite a bit premature. The private sector added jobs at a decent pace in July. Okay, the level is clearly not enough to get the unemployment rate to fall very much despite the decline posted in July. Though down is good, we need better job gains in the months ahead to really make a dent in the way too high unemployment rate. This report, though, does hold out hope that that could happen. The increases were widespread with just about every sector from manufacturing through retail and services showing gains in payrolls. There was even some hiring by construction firms. Once again, we learned that there is no such thing as a free budget cut. State and local governments sliced another 39,000 more people from their rolls and are now down by nearly 350,000 jobs over the past year. In contrast, the private sector added 1.7 million workers during the past twelve months. In normal recoveries, the public sector adds workers. If the public sector simply stayed flat, there would have been over two million jobs added, a moderate not weak recovery. Even a small public sector rise would have led to the July gains being at or above 200,000 and few people would have been worrying about job growth if that were the case. Weekly hours worked and earnings were up solidly and that points to good income growth. Wage and salary income has been lagging and it is hard to get consumers to spend more if they don’t have the money to spend. Maybe that is changing a little.

MARKETS AND FED POLICY IMPLICATIONS: This report points to the simple fact that the economy is not in recession. Hopefully, that buoys fearful investors. There is no arguing that conditions are good but there is a difference between the stock markets and the real economy. Wall Street and Main Street have become delinked. So don’t assume a stock panic means the economy has suddenly nose dived. I stand by my forecast that the economy is not likely to go into another recession and indeed if the decline in oil prices holds up, falling gasoline costs should lead to better growth as we move through the fall. There are implications in this report for Fed policy. The public sector job cut backs are a real drag on growth and the debt ceiling agreement makes it clear that belt tightening will continue to restrain activity for a long time. Monetary policy will have to lean against that headwind and that means the FOMC could signal next week that it is prepared to keep rates low for a longer period of time than had been expected.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

June Consumer Spending and Income

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: June Consumer Spending and Income
KEY DATA: Consumption: -0.2%; Disposable Income: +0.1%

IN A NUTSHELL: “With gasoline prices high, incomes not growing and the craziness in Washington creating uncertainty, is it any surprise that people stopped spending?”

WHAT IT MEANS: If the recovery is ever going to gain speed, it will have to come from households deciding they want to spend money again. That will trigger the spending of the $2 trillion sitting on the books of businesses. Well, in June households didn’t hit the malls or vehicle dealers very hard at all. Consumer spending slowed, especially for big-ticket items. There was some increase in soft good items but nothing to write home about. Meanwhile, the services segment, which is nearly two-thirds of all spending, continues to go nowhere. This part of the economy normally grows solidly and consistently and the failure to do so is a clear sign that people are still extremely cautious. Of course, to be able to spend a lot of money you need to make a lot of money and income growth is extremely weak. Wage and salary income was actually down in June. As for inflation, the declining gasoline prices led to a drop in costs.

MARKETS AND FED POLICY IMPLICATIONS: It’s tough to say anything positive about a report that points to consumers spending less money and wage and salary income falling. The spring data have been pretty distressing but we already know that given the weak GDP report. The question, as usual, is where we go from here. What worries me is that businesses are deriving their strong earnings growth through productivity gains, limited wage increases and foreign activities. While that may be good for an individual firm, when most companies do that, income gains become so limited that spending and ultimately growth fades. That is the problem we are now facing. Firms are generating robust earnings but Wall Street is delinked from Main Street and those profits are not creating lots of jobs. Until that changes, there is little reason to expect a strong rebound in growth, especially given the brakes being applied by the weak housing market and the cautious financial sector. At least the debt ceiling bill didn’t cut too much spending in the short term. If there were large spending reductions and/or tax increases, the outlook for growth would be even dimmer than it is currently. Indeed, while almost no economists are marking their short-term forecasts up, the downgrades are minimal. Which raises the question I am hearing a lot today: If a budget agreement was needed to improve growth, why aren’t people more optimistic about growth now that we have an agreement?

RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

February Income and Consumption

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: February Income and Consumption
KEY DATA: Consumption: +0.7%; Disposable Personal Income: +0.3%; Prices: +0.4%

IN A NUTSHELL: “Consumers opened their wallets up but they also had to pay a lot more for their purchases.”

WHAT IT MEANS: Households seemed to be willing to brave the cold and snow and generally bad weather in February to visit their local malls. Spending rose solidly as people bought lots of soft goods and big-ticket items. They are still being cautious on buying services as those are goods they can easily do without. But while the consumption numbers look real strong, a lot of the money coming out of households’ pockets went to pay for rising prices. The Fed’s key inflation indicator jumped and even excluding food and energy it was up at a pace that if continued, would not make the FOMC members happy. Adjusting for inflation, spending was decent but not spectacular. Can consumers pay for all those goods? Well, maybe. Disposable personal income, which adjusts for taxes, rose at a somewhat disappointing pace. Wages and salaries increases were limited and while that may help corporate earnings, it doesn’t do much for spending power. What is of real concern is that incomes rose less than prices. Thus, household spending power actually declined. That does not bode well for economic growth if it keeps up. Indeed, so far this quarter, consumption is growing at a modest pace and it looks like first quarter growth could be as weak as I have feared. The savings rate was just below 6%, a rate similar to what we have seen for the last two years.

MARKETS AND FED POLICY IMPLICATIONS: There is a concept in economics called the “fallacy of composition”. Basically, it says that what is good for an individual may not be good for the whole. If a business restrains wage growth, that will help its profitability. However, if all companies do the same, then income gains are limited. As a consequence, demand grows slowly and so do profits. Much of the strong earnings we have seen coming from large companies is due to international activities so don’t assume that the increases in the equity markets imply strong domestic growth. Main Street and Wall Street are largely disconnected right now. While rising wealth does help, ultimately for this economy to grow strongly we need better income growth. Whether that comes from more hiring or higher wages or a combination of the two, it needs to happen. For the Fed members, this was an uncomfortable report. Spending power is declining as inflation is rising. With growth still disappointing, there is little the Fed can do in that scenario, i.e., it cannot raise rates so slow inflation or add more liquidity to raise growth. As for investors, inflation is not yet a major problem. But it is moving upward so it should not be viewed as being tame, no matter the Fed Chairman may publicly claim.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

December Income and Spending

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

 

INDICATOR: December Income and Spending

KEY DATA: Consumption: +0.7%; Disposable Personal Income: +0.4%

 IN A NUTSHELL:   “Households open their wallets wide in December.” 

WHAT IT MEANS:   All the stories about a strong holiday shopping season turned out to be correct.  Consumers threw caution to the wind (okay, maybe that’s a little over the top) and bought all sorts of goods and services in December.  Yes, they purchased a ton of durable goods led a strong rise in vehicle sales, but it was not just new shiny electrical Volts.  Critically, purchases of services, which constitute about seventy percent of spending, are starting to come back.  People are buying the little things that make them happy and that points to rising confidence a better future spending ahead.  The outflow from wallets, though, was not matched by an inflow of income.  Disposable personal income, the money left after the government puts its hand into everyone’s pockets, rose nicely but not nearly as fast as consumption.  Wages and salaries increased somewhat faster than in November but not at a really strong pace.  Indeed, interest and dividend income gains outpaced increases in workers’ pay.   The savings rate eased back but still remained above five percent. 

 MARKETS AND FED POLICY IMPLICATIONS: This was a solid report that fills in the details of Friday’s GDP report.  We knew then that consumption was strong and helped power the quite decent 3.2% overall gain.  The question is: where do we go from here?  With energy costs surging and the depressingly cold and snowy winter possibly keeping people indoors, we could see a slowdown in demand.  In addition, we really do need greater increases in wages and salaries if consumers will keep going back to the malls and showrooms.  It is likely that the savings rate will fall some more but there is only so much of future consumption growth that can be funded out of savings given the cautious nature of households.  Thus, it is still all about jobs since more employees means more income and more spending.  While investors should like this report, it was not really a great surprise.  More importantly, international concerns will likely play a major role in short-term market behavior.  As for the Fed, the decent fourth quarter growth rate is not strong enough to lead to significant declines in the unemployment rate and thus I don’t expect any change in attitude for a while.

RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advise, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

November Income and Spending

NAROFF ECONOMIC ADVISORS, Inc.

Joel L. Naroff

President and Chief Economist

 

INDICATOR: November Income and Spending

KEY DATA: Consumption: +0.4%; Disposable Personal Income: +0.3%;

IN A NUTSHELL:   “Households may not be shopping ‘till they drop but they are out there buying and that steady, solid pace is sustainable.” 

WHAT IT MEANS:  Bubbles are nice when they are made of glass and hung on trees.  They are not a lot of fun when they cause huge ups and downs in the economy.  That is why I have said on many occasions that I look for consumers to shop ‘till they’re tired not until they drop and that seems to be the case.  Consumption rose for the fifth consecutive month in November and while the pace was not spectacular, it was solid enough.  People bought the little things that make them happy as soft-goods and services spending rose.  They didn’t go out and buy big-ticket items, which were down slightly, but that is okay.  The concentration on the smaller ticket goods is the first step in the spending recovery.  Once job growth picks up, I expect durable goods purchases to rise more strongly.  Nevertheless, with the October spending pace revised upward and the reports of a strong December shopping period flowing in, I would not be surprised if consumer spending grows at a robust 4% or more pace in the fourth quarter.  That would lead to faster than currently projected GDP growth.  While income gains did not keep up with outflows of money, the savings rate is still at a decent 5.3% level.   The one disappointment in the report was the gain in wages and salaries.  This part of income had been increasing solidly but the November rise was less than hoped for.  Still, this component has been somewhat volatile so I wouldn’t be surprised if it bounces back in December. Indeed, the slow decline in unemployment claims tells me the labor market is continuing to firm.      

MARKETS AND FED POLICY IMPLICATIONS: The consumer is back, maybe not in full battle regalia, but households are buying goods strongly again.  The pace of spending is sustainable and as job gains and confidence improve I expect consumption to increase as well.  What we don’t see in this report are irresponsible households that are destroying their balance sheets.  The savings rate is still high enough to allow for a reduction in debt burdens.  Basically, the household sector is doing its part in driving the recovery and with businesses spending on capital goods, as we saw in the durable goods report, the upturn has clearly moved from the government to the private sector.  That is the best news we could have as we close 2010.