Implications: Income and spending both came in below expectations in June, in part due to a steep (and what now appears to have been a temporary) drop in commodity prices. "Real" (inflation-adjusted) personal income was up a solid 0.3% in June. Real personal spending was unchanged but will be one of the last greatly affected by the supply-chain disruptions from Japan. Later today automakers will report on car and light truck sales in July and those figures should show a rebound that will boost the consumer spending data a month from now. Although overall consumption prices declined in July due to commodities, the Federal Reserve can't see the report as vindication. "Core" consumption prices, which exclude food and energy, increased 0.1% in June and are up at a 2.2% annual rate in the past three months. That is above the Fed's target of 2%. The Fed must be confused about how core inflation could be rising when the unemployment rate is above 9% and capacity utilization in the industrial sector is below 80%. In their worldview, core inflation should only be rising when resources are constrained, and we're not even close to that environment in their thinking. Over the long run, we think consumer spending should strengthen for a number of reasons. Consumer balance sheets are healthier and financial obligations (monthly payments like mortgages, rent, car loans/leases, as well as other debt service), are the smallest share of disposable income since 1994. Meanwhile, the underlying trend in worker income continues in a favorable direction, with real private-sector earnings (wages, salaries, and small business profits) up 2.1% in the past year.
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Posted on Tuesday, August 2, 2011 @ 10:54 AM
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