After a disappointing first quarter, consumer spending has begun to bounce back, rising 0.4 percent. Personal income also climbed higher, suggesting greater momentum behind consumer spending in the months ahead.

Personal Income Posts a Stronger Reading

Personal income rose 0.4 percent in April following a 0.2 percent print in March. Personal income growth is now up 3.6 percent since this time last year. Wage and salary income rose a robust 0.7 percent after posting a flat reading in March. The saving rate remained flat for the third month in a row but is down from 5.9 percent last April. After adjusting for inflation and taxes, real disposable personal income rose 0.4 percent for the month. It is the continual increase in real disposable income that underpins our expectation for more robust consumer spending growth in the second quarter of this year.

- advertisement -

Real Spending Activity Picks Up

Nominal consumer spending rose 0.4 percent in April following an upwardly revised March reading. Durable goods spending rose 0.7 percent month-over-month while nondurable goods spending climbed 0.6 percent. The most influential category of consumer spending, services, rose 0.3 percent for the month. After adjusting for inflation, real consumer spending rose just 0.6 percent in the first quarter of this year, resulting in a very soft first quarter GDP print. Today’s report showed that real spending rose 0.2 percent in April while March’s reading was revised higher to a 0.5 percent gain. With April’s reading, the three month annualized rate of real spending is now up 1.1 percent. These stronger readings support our case for consumer spending around 2.9 percent in the second quarter. Looking beyond the second quarter, we expect the pace of real consumer spending to return to its average over the past several quarters of 2.5 percent.

Consumer Prices Continue to Support the Case for June Hike

The Fed’s preferred measure of inflation, the PCE deflator, climbed higher in April, rising 0.2 percent, after sliding 0.2 percent in March. The headline reading now stands at 1.7 percent on a year-over-year basis. Part of the stronger headline reading was due to a rebound in energy prices in April and somewhat higher food prices. Excluding food and energy prices, the core PCE deflator rose 0.2 percent, offsetting March’s 0.1 percent decline. The core PCE deflator is now up 1.5 percent on a year-over-year basis. While prices continue to rise, the pace of these increases has left many wondering if the pace is too slow for the Federal Open Market Committee (FOMC) to raise rates in June. In our view, the FOMC wants to make sure they act ahead of realized inflation pressures. Given the lagged effect of monetary policy, we believe that there is enough evidence that demand pull inflation should resume in the second half of the year. Thus, we are maintaining our view for the FOMC to hike rates again in June and September and announce some form of balance sheet normalization in December.

Previous articleFTSE Bears Test Significant Support on Increased Election Uncertainty
Next articleGBP/USD Mid-Day Outlook
Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A, Wells Fargo Advisors, LLC, and Wells Fargo Securities International Limited. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2010 Wells Fargo Securities, LLC.


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.