Tags: consumers | wages | spend | rise

Confident Consumers May Spend More If Wages Rise

Confident Consumers May Spend More If Wages Rise

Friday, 29 March 2019 03:10 PM Current | Bio | Archive

INDICATOR: March Consumer Confidence, February Income and New Home Sales

KEY DATA: Confidence: +4.6 points/ Feb. Income: +0.2%; Jan. Income: -0.2%; Jan. Spending: +0.1%/ New Home Sales: +4.9%; Prices: -3.6%

IN A NUTSHELL: “The consumer started the year in the doldrums but a pick up in confidence may lead to better spending in the months to come.”

WHAT IT MEANS: Households have not been happy with the world and they showed it through declining confidence and weak spending. Hopefully, that may be changing. First of all, confidence rebounded in March. The University of Michigan’s Consumer Sentiment Index jumped with both the current conditions and expectations components rising solidly. Maybe the most important data in the report was a rise in expected income changes. Lower and middle-income households expect their wages and salaries to increase at a faster pace and that could trigger greater spending.

We have the March confidence numbers, but only the January and February income and spending number and they are not that great. Income rose moderately in February but was down in January. There were no components that were strong and wage and salary gains were mediocre. Meanwhile, consumption rose only modestly in January after having cratered in December. (The government shutdown has messed up the timing of the data releases.) With vehicle sales soft in February, I don’t expect the February consumption numbers will be very good either. In other words, even if spending rebounds in March, as the rise in confidence seems to indicate, first quarter consumption should be quite modest. And that points to a weak first quarter GDP number.

But then there is the weakest link, housing. New home sales rebounded sharply in February and the January sales pace, which was initially estimated to be pretty tepid, was revised up significantly. That confirms the huge jump in existing home demand in February. It looks like the housing market may be coming back. With mortgage rates down in March and prices leveling out, we could see continued improvement in this key sector. Still, the gains were in limited to two regions, the Northeast and Midwest, so let’s wait and see if weather was a critical factor in the improvement.

MARKETS AND FED POLICY IMPLICATIONS: I have argued that the economy was not nearly as bad as it seemed and there could be a rebound in the spring and summer. The recent data are more mixed than they had been and that is good given how poor the numbers were for a couple of months. But don’t expect growth to surge. I am not sure we will even average 2.5% during the middle portion of the year and by year’s end, even that pace could be a thing of the past. Think closer to 2%. That is not a recession, but it is not anything that makes people feel good. It is growth that could be enough to accelerate pressure on wages, which is needed since worker compensation numbers are up but not so good that consumption can be strong. In other words, unless some positive shock hits the economy, by the fall, we are likely to be back to where we were before the tax cut bill was passed. What does this mean for the Fed? It is all about inflation. If it remains contained, there is no reason for the gang that cannot think straight to make any move. And for me, that is a problem because the current level of rates is simply too low to provide much ammunition when the next downturn hits.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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The consumer started the year in the doldrums but a pick up in confidence may lead to better spending in the months to come.
consumers, wages, spend, rise
Friday, 29 March 2019 03:10 PM
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