INDICATOR: April Spending and Income, Pending Home Sales, May Layoffs and Weekly Jobless Claims

KEY DATA: Consumption: +0.6%; Disposable Income: +0.4%; Prices: +0.2%/ Pending Sales: -1.3%; Over-Year: -2.1%/ Layoffs: 31,517/ Claims: -13,000

IN A NUTSHELL: “Consumers are spending more but saving less, which is nice for now but raises questions about the future.”

WHAT IT MEANS: We are beginning to see the power of the tax cuts. Household disposable, or after tax, incomes grow solidly in April, after two months of fairly mediocre gains. Wages and salaries, though, didn’t increase at any great pace. Much of the rise in disposable income came from reduced taxes and higher interest income, the result of the rising interest rates. Nevertheless, consumers spent like crazy. Even adjusting for inflation, which was moderate, spending was strong. Critically, every major category, durables, nondurables and services, was up solidly. The surge in gasoline prices, which added to the total, was a significant reason in the rise but not the only reason. Can spending hold up? That is much less clear. More money went out than came in and the household savings rate fell once again, approaching the historic low set last December. With inflation-adjusted after-tax income having increased by less than 2% over the past year, there really is a limit to how fast households can spend.

Pending home sales moderated in April. The National Association of Realtors index has been bouncing all over the place over the past year, but is largely going nowhere. No region posted growing sales in April and since April 2017, only the South was up and that was modestly. Rising rates coupled with soaring prices are not helping this key sector.

The labor market, as anyone who has had to hire someone knows, remains tight. Challenger, Gray and Christmas reported that layoff notices remained extraordinarily low in May. Except for retailers, not a lot of industries are cutting back. With firms holding on to their employees tightly, it is no surprise that unemployment claims are low. They fell last week and while the level is above the labor force-adjusted historic lows, they are not that far from that trough.

MARKETS AND FED POLICY IMPLICATIONS: The second quarter has started off with a bang. Spending is already running at a roughly 2.7% pace and that assumes no increase in May or June. It looks like we could see consumption up about 3.5% this quarter, which would make hitting the 3% growth target very likely. But the real question is whether that level of consumption growth is sustainable and I just don’t think that is likely unless income gains accelerate. But that is not happening, at least at any great pace. So, households will have to cut their savings rate to historic lows to keep up the pace. And when you add in the softening in housing, it is hard to get to more than a couple of quarters of strong growth. While that is good for the Fed, which is not likely to be forced by robust growth to raise rates, it has to eventually enter the thought processes of investors. The next FOMC meeting is only two weeks away, on June 12-13, and the Committee is likely to raise rates once again. Since this is a press conference/economic projection meeting, we should get some indication about the thinking of the members on three or four hikes this year. I still think there is likely to be four increases.

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