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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