Tags: Naroff | spending | consumption | unemployment

People Went Shopping at the Mall to Cool Down this Summer

Thursday, 30 Aug 2012 10:26 AM

INDICATOR: July Spending and Income/Weekly Unemployment Claims

KEY DATA: Consumption: Up 0.4 percent; Disposable Income: Up 0.3 percent/ Unemployment Claims: 374,000 (unchanged)

IN A NUTSHELL: “Apparently, consumers decided to cool off at the malls and spend money at the same time, and that is good news for the economy.”

WHAT IT MEANS: With the brutally hot summer coming to an end, the question is: What did households do to save on cooling costs? It looks like they went shopping.

Consumption rose sharply in July, and the largesse was spread all around. People bought big-ticket items and smaller goods.

But most importantly, households spent solidly on services.

I have been focusing on the weakness in this segment of consumption, since it constitutes two-thirds of all spending and about 45 percent of the total economy. There was an upswing in the spring and that has continued into the summer. It is hard to grow solidly if a large portion of the economy is stagnant, and that may no longer be the case.

Can households keep up the pace? Probably. Income adjusted for taxes and inflation rose a little less than spending did, but the savings rate eased only modestly, from 4.3 percent to 4.2 percent. That is still higher than the average for the past year.

The disappointment was in the growth of wages and salaries: They were up, but not at a pace that would make a whole lot of workers happy.

Separately, unemployment claims were unchanged. The average for the past month is consistent with job growth in the 150,000 to 175,000 range. We will find out a week from Friday whether August’s payroll increase is similar to the 163,000 July gain, but for now, that is the best guess.

MARKETS AND FED POLICY IMPLICATIONS: This was a really good spending report, especially if you consider that people might have stayed home at night watching the Olympics instead of going out.

Vehicle sales are improving slowly, and if the demand for services holds up, we could see a rebound in consumption this quarter.

Changes in spending take time to translate into hiring decisions, so don’t expect any surge in hiring even if consumption improves. Growing spending raises questions about what Federal Reserve Chairman Ben Bernanke will say at tomorrow’s closely watched speech in Jackson Hole, Wyo.

Since the Fed’s Aug. 1 meeting, consumption has accelerated, the July jobs number was double the previous three-month average and income growth has improved.

Third quarter growth looks to be higher than the second quarter, and while something in the 2 percent to 2.5 percent range might not be great, it should be enough to keep the Fed from implementing another round of quantitative easing. Indeed, does it make any sense for the Fed Chair to go out on a limb and signal new actions when a week later the employment report could render those actions unnecessary? No.

If the August employment report is weak, the Fed will have the cover it needs to make a move at the Sept. 12 and 13 meeting anyway. While those with a stake in the markets are hoping and praying for an easing announcement, I expect Bernanke to be a good Fed Chair and use both his hands and temporize.

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Thursday, 30 Aug 2012 10:26 AM
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