- INDICATOR: June Spending, Income and Home Prices
- KEY DATA: Consumption: +0.4%; Income: +0.2%/ Home Prices: +1.1%; Year-over-Year: +5.7%
- IN A NUTSHELL: “The disconnect between Main Street and the C-Suite continues as the consumer alone continues to shoulder the burden of keeping the economy going.”
WHAT IT MEANS: Leadership can be lonely and the consumer is one lonely leader. While CEOs hunker down and wait for the sky to fall, households continue to spend money quite solidly. Consumption was up in June as sales of soft-goods and services jumped. The only thing holding down spending was a sharp drop in vehicle sales that led to a decline in durable goods demand. On the income side, earnings rose a little less than expected, given the sharp increase in payrolls. Wage and salary reductions in the manufacturing sector restrained the gain as compensation was up decently in services. With incomes expanding slower than spending, the savings rate dropped to one of the lower rates since the Great Recession took hold. As for inflation, it was modest whether you included or excluded food and energy.
As we have seen in the many sales numbers that were recently released, the housing market remains in very good shape. CoreLogic reported its numbers on June home prices and they rose solidly both over the month and over the year. The pace is not so great that it should create worries that a housing bubble is forming. Only two states, New Jersey and Connecticut, posted declines over the year.
MARKETS AND FED POLICY IMPLICATIONS: The income and spending data were not a major surprise as they could be largely inferred from the second quarter GDP report. But they do remind us that households are more than willing to part with their hard-earned income. They are buying all types of goods and services and investing in housing. Meanwhile, CEOs have hunkered down and are refusing to invest in their businesses. Capital spending is soft and restraining growth. Even if you exclude the energy sector and its related industries, the level of investment growth is nothing special. That raises the question: Why the disconnect between Main Street and the C-Suite? Has the world economy totally taken over thinking at the top of the corporate ladder? If businesses don’t invest, future economic growth and productivity will be lowered and that is what is happening. Earnings may not be great right now, but they will not get a whole lot better if businesses don’t improve their productive capacity – and they are not doing that. Propping up current earnings by limiting capital spending is shortsighted. That failure is something that should concern the Fed, even as the members gain solace from the solid consumer spending and income numbers.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.
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