Personal income up 0.3% in May; personal spending unchanged
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Implications:  Consumer spending got slammed by Japan in May, with purchases of durable goods like autos down 1.5% for the month.  As a result, total consumer spending was unchanged for the month.  With consumption prices up 0.2% in May – that was before the recent dip in oil prices – "real" (inflation-adjusted) consumer spending fell slightly.  As we have said repeatedly, we believe these effects are temporary and will result in a forceful rebound in spending later this summer.  Late this Friday (July 1), we expect automakers to report the start of the rebound, with sales bouncing up off the May low despite very skimpy manufacturer and dealer incentives in June.  Longer term, consumer spending should strengthen.  Consumer balance sheets are healthier and their financial obligations (monthly payments like mortgages, rent, car loans/leases, as well as other debt service), are the smallest share of disposable income since 1994.  Meanwhile, the underlying trend in worker income continues in a favorable direction, with private-sector wages and salaries up at a 4.5% annual rate in the past six months.  This is more than enough to outpace inflation and that gap should widen in the next few months due to the recent drop in oil prices.  The problem for the Federal Reserve is that its favored measure of "core" inflation, which excludes food and energy, is accelerating, up only 1.2% versus a year ago but up at a 2.4% annual rate in the past three months.  This is an economic problem that calls out for a tighter monetary policy, not the continuation of an overly loose policy.

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Posted on Monday, June 27, 2011 @ 9:57 AM

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