Today’s Personal Income and Outlays report shows consumer spending rose less than economists predicted and far less than inflation. The result is a big decline in real spending. Economists surveyed by Econoday missed the mark once again.
Inflation is nearly at the Fed’s 2.0 percent target, up a sharp 3 tenths to 1.9 percent for the PCE price index which is the strongest rate since April 2012. The monthly gain, reflecting rising energy costs, rose an outsized and higher-than-expected 0.4 percent for the highest reading since February 2013. But the core, which excludes food and also energy, held steady at 1.7 percent though the monthly rate for this reading did rise 0.3 percent which is the largest increase since January last year.
Turning to spending and income, personal consumption expenditures could muster only a 0.2 percent gain, 1 tenth below the Econoday consensus in a marginal gain that belies the enormous strength underway in consumer confidence. And when adjusted for inflation, spending fell 0.3 percent for the largest drop since September 2009.
But income is solid, at a monthly 0.4 percent with the wages & salaries component also rising 0.4 percent. The savings rate steadied in the month, up 1 tenth to 5.5 percent.
The PCE price index will put the pressure on the Fed to raise rates at the mid-month policy meeting. Though it’s not quite at target, its clear upward trajectory makes a successful breach all but certain. Turning back to spending, January’s weak opening points to downward revisions for first-quarter GDP estimates.
Energy Related
On February 14, I wrote about the PPI for January in PPI Spikes 0.6% in January, Largest Jump in 20 Months: Start of Inflation Run? Will February Repeat?
Please take a look. The price spike was a delayed reaction to a November-December energy price surge.
Here is a weekly crude chart from today.
Crude may go up or down from here. I cannot say which. But the big jump in inflation is related to an energy surge months ago.
This report will have some writers talking about stagflation once again. If energy prices rise, and housing tumbles, they could be right.
Preempt Trump
Did the Fed have an advance copy of this report yesterday as part of its preempt Trump effort? For further discussion, please see:
- March Rate Hike Odds Surge to 80 Percent: New Standard for “Surprisingly Strong” Economy
- Trump’s Speech: Good, Bad, and Ugly Point-by-Point; Was Trump Preempted by the Fed?
Mike “Mish” Shedlock
Crude inventories are up for last 8 weeks, gasoline refineries repair distilling equipment in March slowing the retail end of the market. It’s not as bad as 2 years ago when storage was full but never set off alarm bells like everybody expected. My bet is March will be business as usual.
Is it possible many Americans finally have enough “stuff”? When I drive through my neighborhood I see many garages packed with “stuff” while the cars sit outside. Now & then I see a house with a yard that is overflowing with “stuff”.
Quite possibly consumers are reaching saturation point in buying. How much more garbage retiring boomers need? They do keep buying cars, and that has held up spending.
Retirees are losing pensions, costs of healthcare going up and insurance is often pushing back costs (covered in the past) back to them. This along with ever increasing tax on what had been considered sacred and steady, home ownership, is threatening the good life many of them felt was the end result of working hard for so long. Saturation, yes, along with younger generations embracing minimalism is part of this. But the retirees haven’t got nearly as much wealth as they once thought they’d have. Many have alot of debt because of this thinking.
I’ve also been seeing reports of more car lots expanding for excess inventory…
Yes, retirees are generally not buying stuff around here. Many are dumping stuff. Most of the discretionary spending seems to be on travel.
Very possibly peak “stuff” and not enough kids coming along to inject new demand for more new “stuff”.
Boomers are getting older. They are downsizing, not expanding. The only thing boomers are sending more money on is healthcare. This is all about demographics.
I have always wondered why these economists don’t tweak their model since it keeps coming out so consistently wrong.
Just “WHO” benefits from the “Federal Reserve’s Inflation Targeting Policy” ? And “WHO” is screwed by it ?
Answer those questions, and “become one with the force”.
Once peak consumer product demand is passed, what then?
Experiences?
Healthcare?
Spiritual development?
No need to worry about robots if no one wants the “stuff” being turned out.
The employment rate is only going flat or one way, reducing demand further.
Even free money won’t have much of a multiplier.
Will the West become Japan or worse as Japan could always ship “stuff” to the West.
Enter stage left the Developing Market consumer – Africa, SE Asia, India, S America.
Exports needed, but the $ is a handicap.
Mish,
I look at it from the other side of the coin. The reason inflation measures were subdued was due to the crash in energy prices. Without this effect on housing (heating) and transportation (fuel) then inflation would have remained around 2.4% matching the ECI as it tends to do. All energy needed to do was to stop declining for inflation to bounce back to 2.4% or higher. We are seeing that happen now, but it takes time on the year-over-year basis.
The bounce back in inflation measures will subtract 1% from real GDP and consumption models even though nothing has changed. So yes stagflation talk is very likely if the Fed chase inflation higher and in turn cause home prices to decline. Each one percent rise in 30-year mortgage rates requires a 10% decline in price to hold monthly payments steady.
But do interest rate hikes have much effect on inflation? I doubt it, so the Fed is not only going to find itself behind the power curve but also without the tools needed to slow inflation without inducing a recession. How do interest rates affect rents (40% CPI weighted) or medical costs or energy prices? They don’t directly. How do they affect financial asset prices?
So a stronger economy could tank the markets after the current melt-up runs its course.
Wait until y’all see what happens to “personal spending” as more and more boomers retire and start drawing on all the various “vanishing pension plans”(George Carlin’s term) that are even mildly underfunded. Never mind those like in Illinois that Mish has documented.
And it looks like pension failures have begun with the Teamsters plan in NY. Oh Boy.
I’m waiting for the day that big Teamster plan fails(400,000+ pensioners).
Can you imagine the members of any teamster union just simply rolling over, going meekly into the night, saying “gee that’s a bummer”?
I believe that the coming widespread pension plan defaults will be BIG news this year—including the biggest ponzi–SSI