Popular Economics Weekly
Consumer spending, largely on services, helped hold up first-quarter real GDP which came in at just 0.5 percent rate, but is still up 2 percent Year-over-Year. Consumer spending (personal consumption expenditures) rose at a 1.9 percent rate, down only 5 tenths from the fourth quarter. Most of spending was on in the service sector, which rose a respectable 2.7 percent to offset a 1.6 percent decline in durable goods (i.e., manufacturing) which were hit by weak vehicle sales.
Even durable goods ticked up slightly, as reported by the Bureau of Economic Analysis last Tuesday. The factory sector posted a respectable March with orders for durable goods up 0.8 percent which follows a revised downswing of 3.1 percent in February and a very solid 4.3 percent gain in January. This is a sign that the manufacturing sector may finally be recovering from last year’s too strong dollar (when the Fed said it was going to raise interest rates up to 4 times) which hurt exports.
Strength was mainly in defense goods which helped offset a downward swing for commercial aircraft. A negative in the report is a 3.0 percent decline for motor vehicle orders reflecting weakness at the retail level. But light vehicle sales in particular are predicted by auto industry pundits to exceed even last year’s rate of 17.5 million vehicles.
We mentioned last week that moderate wage growth, declining gasoline prices and continued low interest rates on auto loans could drive new car and light truck sales higher in 2016, according to Steven Szakaly, chief economist of the National Automobile Dealers Association, at the Los Angeles Auto Show.
“New light-vehicle sales will rise to 17.71 million units in 2016, a 2.3 percent increase from our forecast of 17.3 million sales in 2015,” Szakaly said. “This would mark the seventh straight year of increasing U.S. new-vehicle sales.”And, residential investment is up 14.8 percent, a highlight of the report that helped offset a sharp 5.9 percent decline in nonresidential investment where weak energy drilling is taking a big toll. Inventories rose in the quarter but at a slower rate which is a negative for GDP while exports, reflecting weak global demand.
Government purchases were a small plus in the quarter, which will rise as more infrastructure spending kicks in this spring due to the renewed $305B gas tax and surface transportation bill. Government spending is still the weak link in GDP numbers, as tax revenues are only now growing again.
And today’s Personal Income and Outlays report showed consumer spending was still weak in March, though net weakness in the quarter was tied largely to what is a positive for the consumer, lower fuel prices. Spending on non-durables (i.e., services) is a clear weakness in the report, up an unusually low 0.1 percent in the month.
But stronger consumer income is an important positive for the economic outlook, offsetting weakness in spending and stubbornly low inflation. Though the gain for wages does hint at emerging pressures, this report doesn't turn up the heat for a June rate hike, since PCE inflation is still below the Fed’s inflation target of 2 percent.
Bottom line is the Federal Reserve predicts that consumer spending will eventually pick up this year, and so retail sales, as consumers begin to spend some of the savings from lower gas and commodity prices. But if spending doesn’t pick up, the Fed may not raise interest rates further this year at all.
Harlan Green © 2016
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