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.