Home / World / American Consumers Prop Up the Economy. Wall Street Clamors for Multiple Rate Cuts. Fed Blows Off Wall Street

American Consumers Prop Up the Economy. Wall Street Clamors for Multiple Rate Cuts. Fed Blows Off Wall Street



The economy is in a "very good place," says Trump's man at the Federal Reserve. And the favorite inflation measure of the Federal Reserve increases.

The message from the Federal Reserve was that it could consider reducing rates if the economy deteriorates or if inflation continues to fall, but the economy is currently in a "very good place," he says. And consumer spending, 70% of the economy, is growing well instead of deteriorating, and the Fed's favorite measure of inflation has just increased. But do not tell Wall Street.

Consumer spending on goods and services in April, according to data from Personal Consumption Expenses published this morning by the Bureau of Economic Analysis, increased 4.3% compared to April last year, at a seasonally adjusted annual rate of $ 14.39 billions. This represents about 70% of the US economy of $ 20.5 billion. And that's why everyone looks at consumers, whose only job is to consume, or otherwise. This increase was just in the range since the Great Recession, it is not the highest growth rate in the history of mankind, but it is decent:

Of these $ 14.39 billion that consumers spent, $ 9.96 billion was spent on services, which is why the service sector is so crucial to the economy. $ 4.43 trillion were spent on goods ($ 1.47 trillion in durable goods and $ 2.96 trillion in non-durable goods). In addition, consumers generated more than $ 368 billion in interest. All these are "seasonally adjusted annual rates", which means that if consumers go to the rhythm of April throughout the year, these would be the totals for the year.

Adjusted for inflation, real spending on personal consumption in goods and services increased 2.7% compared to April last year. This was also right in the range since the Great Recession:

So, how did the consumers get this amount of moolah?

Personal income increased 3.9% from the previous year to a seasonally adjusted annual record rate of $ 18.1 billion in April. Personal income includes salaries; Supplements to salaries, such as employer contributions to pension and insurance funds; rental income; agricultural income; interest income and dividends; social benefits of the government, such as social security, unemployment insurance or VA benefits; and similar. More details in a moment.

Adjusted for inflation, real personal income increased 2.4% from April last year, in line with the last couple of years:

Among the factors that contribute to the growth of personal income and expenses are population growth (around 0.8% per year) to almost 329 million, based on this report, employment growth (1.8%). % in the last 12 months) and growth in various forms of income.

Revenue from "wages and salaries" in this report increased 3.6% year-on-year to a seasonally adjusted annual record rate of $ 9.07 billion. As high as it is, it represents only half of the total personal income of $ 18.1 billion.

Among the other forms of personal income: interest income increased 1.6% year-on-year to $ 1.6 trillion, and dividend income increased 4.0% to $ 1.17 trillion.

The following table shows the personal income categories of the BEA report for the first four months of 2019. All amounts in billions of dollars, at annual rates adjusted for seasonality:

The disposable income is what remains after the government ends personal income. Therefore, it is personal income less personal taxes and other contributions to government social insurance, such as contributions to Social Security, Medicare, unemployment insurance and the like. The disposable income increased 3.8% with respect to April of last year, at a seasonally adjusted annual record rate of $ 15.96 billion.

Adjusted for inflation, the real disposable income increased 2.2%, also in the middle of the range:

Given this heap of disposable income minus all disbursements, consumers saved $ 990 billion in April, at an annual rate adjusted for seasonality. This produces a 6.2% savings rate on disposable income.

Consumers are making more money, and they are spending most of it to shore up the economy, and they are also saving something. In other words, American consumers in general are doing their job.

In the same report this morning, the Commerce Department said that the favorite inflation measure of the Federal Reserve, the price index of the PCE without food and energy, or "central PCE", rose by 1.6% in the period of 12 months, against an increase of 1.5%. in March. While this remains below the Fed target of 2.0%, it is going in the right direction for the Federal Reserve (and in the wrong direction for consumers).

The "Cropped PCE Average Inflation Rate", mentioned by Fed Chairman Jerome Powell to show that the drop in inflation was "transitory" and that eliminates outliers, increased to 2.03%, on par with the peaks in July 2018, January 2017, and just below the recent high of January 2012 (2.10%).

And consumers are excited. The University of Michigan said this morning that its consumer confidence index for May rose to 100, from 97.2 in April. This level of 100 is close to the highest level in the last two decades. You must go back to the years of Dotcom Bubble to find consumers constantly more enthusiastic.

Consumer confidence may be affected, and the prolonged rhetoric of the commercial war, a 50% drop in the stock market, a major episode of inflation that makes things out of reach, or other events could shake the consumer confidence. But in the past, we have seen that even with a baffled confidence, consumers are still rushing, spending what they do, or more than what they do, no problem, because American consumers are very strong people.

Meanwhile, Wall Street is going crazy with speculation of rate reduction, trying to outdo each other to fuel the flames of rate reduction. Barclays just came out predicting Three rate cuts this year, totaling 75 basis points, starting in September … talking desperately about his book.

Meanwhile, even the largest "pigeons" of the Federal Reserve say: wait a minute … the economy is in a "very good place", and it would have to deteriorate and inflation would have to fall before it is time to consider the reduction of fees.

The president of the Minneapolis Fed, Neel Kashkari, was the last. Today intervened on Bloomberg TV, saying it is too early to reduce rates. Low inflation and the escalation of the trade war are a concern, he said. "Any of those could be cause to change the path of monetary policy," he said. But he was not "completely there," he said. "I am very pleased with the fact that the labor market is still strong."

Yesterday it was the vice president of the Fed, Richard Clarida, Trump's man in the Fed, who said that the economy is in a "very good place" and that the economic data would have to reveal a significant risk of a more acute slowdown than the slowdown of the Fed. Expects that before the Fed consider reducing rates.

It is so interesting to see the growing disconnect between even the "pigeons" of the Federal Reserve who insist that now is not the time to cut rates, and Wall Street, which claims three rate cuts this year. Meanwhile, American consumers, who are in charge of propping up the economy, instead of just talking about it, are doing what they do best, working hard and spending their hard earned money.

One of them is wrong. Beware that it breaks in an ugly way. Read … Okay, I understand, the markets are exhausted: junk bonds are in a good mood, treasure bonds for the doom and rate cuts

Do you enjoy reading WOLF STREET and want to support it? Use of ad blockers: I fully understand why, but do I want to support the site? You can donate "beer money". I appreciate it immensely. Click on the beer mug to discover how:

Would you like to receive an email notification when WOLF STREET publishes a new article? Sign up here.


Source link