Consumer Spending Adds to Fed Rate Hike Expectations
- U.S. Personal Income increased by 0.4 percent in April.
- After inflation and taxes, Real Disposable Income gained 0.2 percent for the month.
- Nominal Consumer Spending increased by a strong 1.0 percent in April.
- Real Consumer Spending increased by 0.6 percent in April.
- The S&P/Case-Shiller U.S. National Home Price Index gained 0.1 percent in March.
Income and spending data for April were solid and consistent with stronger GDP growth in Q2 after weak first quarter real GDP growth of 0.8 percent annualized (now revised up from the initial 0.5 percent estimate). Nominal personal income increased by 0.4 percent in April, driven by a 0.5 percent gain in wages and salaries, which account for about half of personal income. We expect to see moderate-to-strong wage and salary gains through the remainder of this year as job growth continues and wages increase as labor markets tighten up. The personal consumption expenditure price index increased by 0.3 percent in April, as the nondurable goods component gained 0.7 percent, reflecting firmer energy prices. The energy price sub-index was up 3.8 percent in April following a 1.1 percent gain in March. After adjusting for inflation and taxes, real disposable income increased by 0.2 percent for the month. Nominal consumer spending increased by a strong 1.0 percent in April as auto sales picked up to a 17.4 million unit annual rate after dipping to 16.6 in March. The durable goods component of nominal personal consumption expenditures gained 2.3 percent in April. Inflation-adjusted consumer spending was up by 0.6 percent for the month. With spending up more than income, the personal saving rate fell from 5.9 percent in March to 5.4 percent in April.
House prices continued to increase through March according to the S&P/Case-Shiller U.S. National Home Price Index, which increased by 0.1 percent in March. Over the previous 12 months, the national HPI was up by 5.2 percent. There is some evidence of cooler price growth in today’s house price report. However, supply remains tight in most markets and this will keep upward pressure on prices through the remainder of this year. Dallas posted an 8.5 percent year-over-year gain in March. Detroit prices were up 6.2 percent. Los Angeles, 6.5 percent. Miami, 6.2 percent. Phoenix gained 5.6 percent. San Diego was up 6.2 percent and San Francisco showed an increase of 8.5 percent over the year ending in March.
Today’s U.S. economic data releases bolster the odds of a Federal Reserve interest rate increase at the upcoming June 14/15 FOMC meeting. Recall the key passage from the minutes of the April 26/27 FOMC meeting, “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it would likely be appropriate for the Committee to increase the target range for the fed funds rate in June.”
Market Reaction: U.S. equity markets opened with gains but have since declined. The yield on the 10-year Treasury bond is down to 1.85 percent. NYMEX crude is up to $49.85/barrel. Natural gas futures are up to $2.27/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Personal Income 05-31-16.
When you are flying close to the treetops, you have to watch out for the downdrafts. Clearly the U.S. economy was flying close to the treetops in the first quarter of this year. Real GDP growth registered a weak 0.5 percent annualized rate. That is about 0.1 percent quarter-to-quarter growth. The sagging energy sector was a major factor. Real business fixed investment declined at a 1.6 percent annual rate, weighed down by minimal oil drilling activity, minimal need for new oil field equipment and a sagging commercial real estate market in energy states. After adding significantly to GDP growth in early 2015, inventories have been a negative factor for the three consecutive quarters ending in 2016Q1. International trade has also been a consistent drag on GDP, subtracting from GDP growth in seven out of the last nine quarters, including 2016Q1. Oil is part of that story, too, as we are still importing a significant volume of crude oil. With the end of the federal restriction on crude oil exports at the end of last year, there is at least the potential for a more balanced energy trade in the future. Federal defense spending was also a drag on Q1 GDP growth. We are still operating under the federal spending sequester which limits federal discretionary spending. Consumer spending held up in Q1 despite the dip in auto sales. Consumer spending accounts for about two-thirds of GDP, and consumer spending on services accounts for about two-thirds of total consumer spending, and therefore about 45 percent of GDP. With an aging population, consumer spending on medical services, and on other services, is set to increase.
- Following on the heels of barely-positive Q1 real GDP, Q2 GDP looks set to increase, but only moderately. We believe that the staggering oil and gas industry will continue to be a weight on GDP growth in the current second quarter. Consumer spending will again be an important counterweight to the energy sector downdraft. Federal government spending will flip back to the positive. Residential construction will continue to be a moderate boost.
- The first employment report for Q2, containing the April jobs data, was weaker than expected with 160,000 net nonfarm jobs added for the month. The unemployment rate held steady at five percent. We expect two things out of the labor market over the near two years. First will be a bounce-back in net employment gains in May. The second will be a gradual decline in the pace of job growth, accompanied by a flattening-out of the unemployment rate by late 2017.
We look for tightening conditions in the global oil market through the second half of this year and into 2017. U.S. and other non-OPEC production is declining due to the dearth of drilling. We expect the U.S. rig count to bottom out by late summer. Global demand, including U.S. demand, for petroleum is increasing. Crude oil inventories will start to decline, supporting firmer pricing. Our year-end 2016 price for WTI is $50.
With high crude oil and petroleum product prices, U.S. and global inflation indicators will start to warm up. We have already seen a hint of that in the March import price index. Both the consumer price index and the producer price index for April will show the push from higher oil and product prices. The Fed will be caught between a soft economy and higher prices. We believe they will hold off on raising the fed funds rates until late this year, when the drag from the energy sector dissipates and GDP gains a little altitude.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: USEconomicUpdate – May 2016.