Weak Job Growth = Weak Income Growth = Weak Spending Growth = Weak GDP
- U.S. Personal Income increased by 0.2 percent in May, held in check by weak hiring.
- Personal Consumption Expenditures were unchanged, before adjusting for inflation.
- The PCE Price Index fell by 0.2 percent in May as energy prices eased.
- New Orders for Durable Goods rebounded by 1.1 percent in May after falling in March and April.
- Initial Claims for Unemployment Insurance dipped by 6,000 to 386,000 for the week ending June 23.
With monthly job gains averaging only 96,000 for March through May, wage and salary income has barely budged, up 0.1 percent in April and unchanged in May. Wages and salaries account for 51 percent of total personal income, and so work income is now an anchor, limiting total personal income to a 0.2 percent gain in May. Consumers, who had been easing their saving rate down since the end of 2011, reversed that trend, increasing the saving rate to 3.9 percent in May. This held consumer spending unchanged in May, after a weak 0.1 percent gain in April. So for the nearly complete second quarter it looks like consumer spending will remain subdued, expanding at about 1.5 percent annualized. This is consistent with our June U.S. forecast which placed Q2 real GDP growth at about 1.7 percent. In a weak job growth environment consumers simply cannot drive the economy forward unless there is a major expansion in consumer credit. We have seen some healthy gains to consumer credit as auto loans increased through late 2011 and early 2012, but credit remains constrained for many households still reeling from the damage wrought by the Great Recession. Inflation readings went backwards in May as gasoline prices fell. The PCE price index dropped by 0.2 percent as the energy sub-index fell by 4.6 percent. The core PCE price index (all items less food and energy) gained a sedate 0.1 percent in May. With the price index down, real consumer spending (after inflation) increased by a weak 0.1 percent. While there ain’t no cure for the summertime blues, a few more jobs would help.
New orders for durable goods increased by 1.1 percent in May after falling in March and April. This is a somewhat volatile series so two consecutive monthly declines is not necessarily a red flag, but three would have been. The manufacturing sector dodged a bullet in May, but there are more bullets on the way. Deepening recession in Europe and slower growth in Asia are taking a toll on demand for manufactured goods worldwide. Also weaker energy prices in the U.S. are a growing headwind for the oil patch. If the count of active drilling rigs eases, that will also take a bite out of demand for the manufacturing sector. Fortunately auto demand looks reasonably solid, as long as job creation holds up. Also, nascent growth in residential construction is a positive for manufacturing. We are not getting a lot of good news from labor market indicators lately. On the one hand, initial claims for unemployment insurance decreased by 6,000 for the week ending June 23. On the other hand, a series of upward revisions to historical data keeps elevating the level of UI claims, now up to 392,000. Claims are expected to drop again through the summer as automakers take shorter than normal breaks for summertime retooling.
Market Reaction:U.S. equities markets opened with gains. U.S. Treasury yields are up at both ends of the yield curve. Oil is up to $81.93/barrel. The dollar is down against the euro and up versus the yen.