Implications: Friday's report on consumer spending drove a stake through the heart of the theory that the payroll tax hike or fears about the federal spending sequester were going to hurt consumer spending. "Real" (inflation-adjusted) consumer spending was up 0.3% in February after the same gain in January. Together, real spending is up at a 3.8% annual rate so far this year. As a result, we are now forecasting that real spending will be up at a 3% annual rate in Q1 versus the Q4 average. In addition, we are raising our forecast for Q1 real GDP growth to 3% (previously 2.5%). For all of 2013 (Q4/Q4), we have been forecasting a real GDP growth rate of 2.5 - 3%. It now looks like growth will be at the higher end of that range. The income numbers are a little trickier right now. Personal income rose 1.1% in February. However, most of the gain was due to tax-related fluctuations in dividends. Companies paid out dividends early in December to avoid the tax consequences of the New Year, artificially lowering payments in January. Now dividends are moving off of that artificial low and back toward normal. Even so, real private wages & salaries are up plow horse-like 1.9% from a year ago. This growth in income, combined with very low consumer financial obligations (debt service and other monthly payments) means consumer spending can keep growing. On the inflation front, the Federal Reserve's favorite measure of inflation, personal consumption prices, was up 0.4% in February but still up only 1.3% from a year ago. Core prices, which exclude food and energy, are also up only 1.3% from a year ago. Both are clearly below the Fed's 2% target. However, given the loose stance of monetary policy, look for inflation to move above the Fed's target later this year.
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Posted on Monday, April 1, 2013 @ 10:09 AM
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