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Jan Income & Spending, Construction Spending, Feb ISM MF, UI Claims

March 1, 2018
By Robert A. Dye, Ph.D., Daniel Sanabria

Cars Weigh Down Spending as Inflation Warms Up

  • U.S. nominal Personal Income increased by 0.4 percent in January.
  • Real Consumer Spending eased 0.1 percent, as auto sales dipped.
  • The Personal Consumption Expenditure Price Index gained 0.4 percent in January.
  • The ISM Manufacturing Index increased to a strong 60.8 in February.
  • Initial Claims for Unemployment Insurance fell by 10,000 for the week ending Feb. 24, to hit 210,000.
  • Total Construction Spending was unchanged in January. 


Nominal personal income increased by a moderate 0.4 percent in January as wage and salary income gained 0.5 percent. Personal taxes paid dropped by 3.3 percent with the rollout of the Tax Cuts and Jobs Act of 2017. Inflation was warmer in January, as the Personal Consumption Expenditure (PCE) Price Index increased by 0.4 percent for the month. Energy prices were a key factor, up by 3.0 percent for the month. After excluding volatile food and energy prices, the core PCE price index was up by 0.3 percent in January. Over the previous twelve months the headline PCE price index was up by a sedate 1.7 percent, still below the Federal Reserve’s near-2-percent target. The core PCE price index was up 1.5 percent over the last year. After accounting for inflation and taxes, real disposable income gained a strong 0.6 percent in January, generally supportive of consumer spending and consumer confidence. However, even with more money to spend, consumers held on to their wallets in January. Real consumer spending eased by 0.1 percent as auto sales dropped following the surge in auto sales last fall. The extra money that came with lower taxes showed up in savings. The personal saving rate increased from a low 2.5 percent in December, to 3.2 percent in January.

The ISM Manufacturing Index for January ticked up to a strong 60.8 in February, indicating ongoing positive conditions for the manufacturing sector. Nine out of 10 sub-indexes were well above the break-even 50 mark, including new orders, production and employment. The prices index is running hot, increasing to 74.2 percent in February. Only customers inventories were down, which is a positive indicator for new orders in an expansive environment. 

Construction spending was unchanged in January. Private residential spending increased by 0.3 percent, driven by new single-family projects. Private nonresidential construction spending dropped by 1.5 percent as spending on both office and commercial projects dropped. Total public construction spending gained 1.8 percent.

Weekly labor data looks good. Initial claims for unemployment insurance fell by 10,000, to hit 210,000 for the week ending February 24. This is the lowest level of new claims since December 6, 1969 (Marcus Welby MD debuted on television earlier that fall). Continuing claims went the other way, gaining 57,000 for the week ending February 17, to hit 1,931,000, still a very low number.

Positive manufacturing and income data in the presence of warmer inflation will keep the focus on Federal Reserve monetary policy. Fed Chairman Jay Powell concludes his semi-annual Congressional testimony today. We agree that the odds of a fourth fed funds rate hike this year look a little higher, but it is by no means a certainty. However, the likelihood of a rate hike at the upcoming March 20/21 FOMC meeting is approaching a near-certainty. Also on March 21, we will get a new dot plot from the Fed and that may add critical information to the debate about a fourth rate hike this year, possibly coming in December, after hikes in March, June and September. 

Market Reaction: U.S. equity markets opened with losses, but remain volatile. The yield on the 10-year Treasury bond is down to 2.86 percent. NYMEX crude is down at $60.68/barrel. Natural gas futures are up to $2.69/mmbtu.

For a PDF version of this report click here: Personal_Income_03012018

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