Stronger Consumer Spending Will Lift Q2 GDP
- U.S. Real Disposable Personal Income increased by 0.2 percent in April.
- The Personal Consumption Expenditure Price Index increased by 0.2 percent in April.
- After inflation, Real Consumer Spending increased by 0.2 percent in April.
- The Consumer Confidence Index eased to a still-high 117.9 in May.
- The Case-Shiller U.S. National Home Price Index was up by 5.8 percent in March, over the previous year.
The April income and consumer spending numbers are consistent with our expectation for stronger real GDP growth in 2017Q2, after a weak start to the year. Nominal personal income increased by 0.4 percent in April, about as expected. The biggest component of personal income, wages and salaries, increased by a strong 0.7 percent in April, after stalling in March. The April catch-up in wages and salaries is not surprising given moderately strong job growth for the month when 211,000 net new payroll jobs were added. After adjusting for inflation and taxes, real disposable income increased by a moderate 0.2 percent for the month. The personal consumption expenditure price index, the key inflation index associated with income and consumer spending data, increased by a moderate 0.2 percent in April, and was up by 1.7 percent over the previous 12 months. Inflation was boosted by consumer energy prices, which increased by 1.0 percent in April. Excluding food and energy, the core PCE price index was also up by 0.2 percent in April, and was up by 1.5 percent over the previous 12 months. Nominal consumer spending increased by 0.4 percent in April, supported by higher energy prices and by a modest increase in auto sales. After adjusting for inflation, real consumer spending increased by 0.2 percent for the month, and is consistent with a near-3 percent annualized rate of growth for Q2 real consumer spending. Consumer spending accounts for two-thirds of GDP, so solid monthly consumer spending numbers through the quarter bode well for GDP growth. With spending increasing about the same rate as income in April, the personal saving rate was unchanged for the third consecutive month at 5.3 percent. With house prices going up, homeowners are building equity in their homes at a good rate, so we expect the personal saving rate to remain fairly steady over the next few months.
Strong consumer confidence is not essential to maintain consumer spending, but it helps. In May, the Conference Board’s Consumer Confidence Index eased to a still high 117.9. This index jumped after the presidential election last November and peaked in March, before giving up just a little ground in April and May. Better economic data in the current quarter should help consumer confidence, and the tight labor market is a major support, but the deteriorating political climate in Washington may be weighing on confidence. Still, when the going gets tough, sometimes the tough go shopping.
Another support to consumer confidence, and also to consumer spending, is home prices growth. According to the Case-Shiller U.S. National Home Price Index, U.S. home prices were up by 0.3 percent in March over February, after seasonal adjustment, and were up 5.8 percent over the previous 12 months. Eighteen of the 20 cities in the Case-Shiller 20-City Index showed monthly house price gains in March. Only Cleveland and Tampa showed minor dips. Solid home prices over the last four years have been a major factor in rebuilding the strength of U.S. consumer spending.
Today’s data for the U.S. economy keeps the green light on for the next interest rate hike by the Federal Reserve. We expect the Fed to raise the fed funds rate range by 25 basis points, to 100-125 basis points, at the conclusion of the upcoming Federal Open Market Committee meeting over June 13/14. According to the fed funds futures market, the implied probability of that happening is 84.2 percent. We also look forward to learning more about the Fed’s plans for balance sheet reduction, expected to start by the end of this year.
Market Reaction: U.S. equity markets opened with losses after a strong week last week. The yield on the 10-year Treasury bond is down to 2.22 percent. NYMEX crude is down to $49.24/barrel. Natural gas futures are down to $3.15/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Personal_Income_05302017.