Personal Incomes and Spending Rise, But Mainly on Price Gains in Energy/Food
Data from the US showed that personal incomes and spending both increased 0.4% in April, figures that were broadly in line with expectations, but a cool down in spending as spending had increased a downwardly revised 0.5% in March.
Unfortunately discounting spending for price changes, we see that spending actually barely registered positive growth as much of the increase came from a surge in the category that covers food and gasoline.Excluding price changes, spending rose a much smaller 0.1 percent.
Consumer spending is the largest contributor to US growth, accounting for around two-thirds of economic activity. In the 1st quarter, consumer spending slowed to a 2.2% rate, which kept the overall GDP growth rate at a very moderate annualized pace of 1.8%.
The big question going forward is how will consumers respond to higher gas prices and signs of a slowdown in macro indicators. In order for the economy’s recovery to be self-sustaining, consumers will have to be open to spending. Gas prices have retreated a bit in recent weeks.
With spending matching incomes, the savings rate remained steady at 4.9% of disposable incomes. This matched the lowest savings rate since October 2008.
The report’s measure of inflation the personal consumption expenditure price index (or PCE) rose 0.3% on the month, and 2.2% higher compared to a year ago. However, the Fed focuses on the core PCE prices which rose 0.2% in April and are up 1.0% on the year. That is up from a record low of 0.7% in December, but still well within the Fed’s comfort zone.
Pending Home Sales Plunge
The number of people who signed contracts to buy previously occupied homes in the U.S. tumbled last month, the latest sign that the battered sector is struggling to rebound. The NAR’s seasonally adjusted index for pending sales of existing homes decreased 11.6% on a monthly basis to 81.9. On an annual basis the pending sales index was 26.5% lower.
The news undercuts the stronger than expected UMich consumer sentiment figure that was released about 5 minutes prior to the pending home sales report.
“The pullback in contract signings is disappointing and implies a slower-than-expected market recovery in upcoming months,” said Lawrence Yun, the NAR’s chief economist.
This report gave the currency markets a jolt, especially the USD/JPY pair that fell sharply in favor of the Japanese Yen in the 15 minutes after the release.
UMich Consumer Confidence Rises
The Thomson Reuters/University of Michigan final May consumer sentiment index increased to 74.3 from the preliminary May reading of 72.4 and from 69.8 at the end of April. That was stronger than expectations of the index to match its preliminary reading.
The end-May current conditions index edged up to 81.9 from 80.2 early in the month. The expectations advanced to 69.5 from 67.4.
The news is a positive sign that consumer have responded favorably to falling gasoline prices during the month and may be in a better mood to spend, meaning next month’s personal spending numbers pick up.
Within the survey, the end-May one-year inflation expectations reading fell to 4.1% from 4.4% in the preliminary May survey, while the five-year inflation reading slipped to 2.9% from 3.0%.
Chief Market Analyst
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