Implications: As expected, the American consumer took a breather in May. As a result, it appears that real GDP is growing at about a 1.5% annual rate in the second quarter. But "real" (inflation-adjusted) personal consumption is still up a respectable 1.9% from a year ago and at an all-time record high. We expect spending to continue to move higher over the rest of the year as incomes continue to rise. In other words, real GDP should pick up as well in the second half. Real incomes are up 1.4% versus a year ago and up at a 3% annual rate in the past three months. This growth is not due to artificial support from government spending. Real private sector wages and salaries are up 2.4% in the past year, while real government transfer payments are down 0.9%. In addition, spending will also get a boost from a drop in households' financial obligations – recurring payments like mortgages, rent, car loans/leases, as well as other debt service – which are now the smallest share of income since 1993. Meanwhile, on the inflation front, the Fed's favorite gauge of inflation – core PCE, which excludes food and energy – is up 1.8% from a year ago, just ever so slightly still below their target of 2%. Given healthy spending patterns and inflation already close to the target, the Federal Reserve still has no justification for another round of quantitative easing. In other news this morning, the Chicago PMI index, which measures manufacturing activity in that area, came in at a 52.9 for June, beating consensus expectations. As a result, we expect an above-consensus 53.0 for next Monday's nationwide ISM manufacturing report.
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Posted on Friday, June 29, 2012 @ 9:40 AM
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