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Here’s my quick take ...
1. The numbers, part 1. Total personal income (which is about 84% of GDP) inched up just 0.1% for January. But personal consumption expenditures (71% of GDP) expanded 0.5% in money terms and 0.3% in volume terms. Lesson of the day: in principle, you can get to GDP by adding up all incomes OR by adding up all spending on final goods and services.
2. Is the economy growing fast or slow? It all must balance out, but the consumption numbers, which can be viewed in inflation-adjusted terms, probably will deliver the better “read.” January consumer spending alone already stands 2.2% (annualized) above the Q4 average. Any further spending increases will be accretive to this figure; so 2 ¾ % spending growth is a reasonable expectation for Q1.
3. A saving grace? The personal saving rate fell from 4.2% in December to 3.3% in January. We definitely need more income growth, but a drop of the personal saving rate is an indication of consumer confidence, so at least the mindset of consumers is still positive. Consumer will dip further into savings generally when they feel more confident over the economy’s prospects. Fears on the economy beget a higher saving rate.
4. And the reason was… Why was the rise of personal income so feeble in January? Actually, there was a pick-up in the growth of employee compensation, from +$6.3B in December to +$37.0B in January. That’s good. The problem in January was that proprietors’ income fell (-$3.2B), rental and dividend income retreated (-$20.8B), and with regards to disposable income, personal taxes increased (+$59.0B). That personal tax increase would have covered ALL increases in January personal outlays (+$53.0).
5. Gobble gobble. Meanwhile, total consumer spending prices advanced another 0.2% (y/y = 2.1%). Excluding food and energy items, the PCE price measure was unchanged (y/y = 1.4%), but consumers still have to shell out for the other items. Even at the modest 0.2% monthly pace of the total, in 30 years these price increases will eat up 51% of the purchasing power of today’s $1.00.
6. The numbers, part 2. The Institute for Supply Management (ISM) reported that the composite Purchasing Managers’ Index (PMI) dropped 1.9 points in February, to a reading of 56.5.
7. Not to worry! Hey, we all want to see these numbers zoom to the moon. But here’s the “bottom line:” a reading of 56.5 is a very healthy indication for manufacturing. Indeed, the ISM says that if this figure were to be sustained, it would be consistent with 4.9% GDP growth. Who would not be satisfied with that?
8. Details, details. The new orders component (59.5) and production component (58.4) were still very strong. On top of that, the employment component picked up 2.8 points, to 56.1. That’s approaching a “strong” reading, too. Hold on to your hats: within the next couple of months we are going to see some increases in manufacturing payrolls, by the official count.
9. Imports = 56.0; exports = 56.5. Trade is flowing in both directions.
10. A good solution to this problem. The ISM members said that their inventories contracted in February (with a reading of 47.3). Furthermore, the ISM members said their customer inventories were way too low (reading = 37.0). No wonder delivery times are lengthening, and at an accelerated pace (delivery times = 61.1, up 1.0): there are little stocks on hand as everybody is living hand-to-mouth. The simple, good solution to this “problem:” speculate on recovery and produce more!
11. Nagging problem. Price pressures are still building very fast. Even though the prices survey component saw a dip of 3 points, to 67.0, that level is still consistent with both a broad and spirited advance of prices. But Washington tells us that there is no inflation problem… (This could also be another reason why it might make some sense to build some inventories now.)
12. The numbers, part 3. Total construction spending for January receded 0.6%.
13. Res recovery? Well, to a little extent. Residential construction spending rose 1.3% in January, but with that increase, it is still a bit below its Q4 average. But increases in February and March might fix that.
14. Nonres is a nonstarter. Nonresidential construction expenditures plunged 2.1% in January, extending a trend: down! The weakness was across a broad front: office = -9.8%, commercial = -0.5%; health care = -0.5%; communications = -6.0%; and manufacturing = -4.8%. Ouch!
15. Public is puking! [Excuse, please, as I stretched for the alliteration.] Public construction spending contracted 0.7%, as budget cutbacks are not being offset by stimulus plan, shovel ready spending. Prediction: you are going to be reading this year about lots of states and municipalities who will be suffering severe budget crunches.
Dr. Ken Mayland ClearView Economics, LLC www.cvecon.com 216-595-9931
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