• INDICATOR: December Spending, Income and Pending Home Sales
• KEY DATA: Consumption: +0.5%; Income: +0.3%; Prices: +0.2%/ Pending Sales: +1.5%
• IN A NUTSHELL: “Consumers spending is holding up generally across the economy.”

WHAT IT MEANS: The final numbers for 2016 are trickling in and for the most part, they indicate the economy is in good shape but not accelerating at any great pace. Consumption rose strongly in December, which was expected. A jump in durable goods demand, mostly from vehicles, as well as a solid gain in services such as utilities helped power the sharp spending increase. Soft-good demand rose somewhat less. Still, this is a clear indication that people are willing to out there and spend. They should be able to keep that up. Income rose moderately, led by a rebound in wages and salaries. Unfortunately, much of those income gains are being eaten up by the rise in the inflation. Prices rose solidly as energy costs keep going up. Top line price increases over the year are up 1.6% and are closing in on the Fed’s target level slowly. The Fed members have some breathing room, but that is fading. Income adjusted for taxes and inflation rose at a slower pace in 2016 than in 2015. That is not a good trend. The recent decline in the savings rate is not a major concern as it is till at a decent level.

The National Association of Realtors reported that pending home sales rebounded in December after having crashed in November. Solid gains in the South and West outweighed more modest declines in the Northeast and Midwest. An interesting division that was highlighted in the report was the huge increase in pending home sales in the $250,000 and above group since December 2015 compared to a decline in the under $100,000 group. A dearth of homes on the market at the lower levels, as well as the recent rise in mortgage rates, is hurting the low-priced segment.

MARKETS AND FED POLICY IMPLICATIONS: Since the income and spending numbers for the final month of any quarter are released after the GDP data for the entire quarter, they usually are non-events. But they do provide some detail for the latest month and in this case, it is clear that consumers are still willing to part with their income, which is rising. The savings rate is being used to maintain spending and prices are pressuring households who are still not receiving significant increases in their wages. That raises some flags about spending going forward. Yes, confidence has been rising, but you still need the money to spend and while the labor market is tight, firms are still willing to go without rather than pay up for new workers. The FOMC starts its two-day meeting tomorrow and the expectation is that no rate hike will be announced. However, I am looking for a warning or suggestion that if fiscal policy starts to become expansionary rather than contractionary, the Fed will have greater ability to normalize rates. That is, rates will rise faster than expected.

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