Friday, June 27, 2008

Ain't nothin' like the real thing, baby

News headlines are hopping with nominal income growth up at a 23.4% annualized rate in May. But this is what economists call 'money illusion'. It is the illusion of having more to spend when in fact what you have to spend will buy less than you think because of the ravages of INFLATION!

INFLATION SUCKS the life out of nominal income gains...
This month, two factors are at work distributing distortion over data trends: one is the distorting effects of inflation that make spending look stronger than it is. The second is that, for income, tax rebates have boosted income in the month. Even so the net impact does not produce the out-sized bulge that many have looked for form consumer spending.

Is that a bulge in your spending or are you just happy to see me?
Core nominal income components already are faltering: look at what makes up about 53% of income: wages and salaries. Nominal growth over 12-months is at an annual rate of 4.6%, over six months that drops to 4.1% and over three-months that drops to 2.7%. But in real terms it is much worse. These same figures, deflated by trends in the PCE deflator, shrink more. Over 12-months the annual pace of wages and salaries is 1.2%; over 6-months it's 0.8%; over 3-months it is -0.5%. With that as the fundamental trend for your income, how strong do you think spending is going to get? Yeah, spend a chunk of the rebate, then what?

Spend spend spend..or save?
Spending makes sense if it is supported by income gains and right now it is not supported by income fundamentals. In May REAL consumption spending rose in the month at a strong 4.4% annual rate. The real rate over three-months is 3.1%. The real rate at the two month mark of of the second quarter is only 2.3%. This is not a huge boost from the gigantic slug of tax rebates.

Whence goes the stimulus?
The GOOD news is that consumers are spending in May in a way to keep a chunk of the stimulus at home. Spending on services spurted in May at a 4.9% pace. Services dollars are most likely to be spent on domestically provided stuff, helping US growth the most. Non durable goods spending grew at a 4.5% pace and a lot of those items from clothes to gasoline are imported. That stimulus leaks out and does not help the US. It helps the foreign producers that made the goods that US consumers purchased. Durable goods spending was up at just a weak 1.4% pace in May.

The score in Q2...
But the picture in Q2 is different from May. Real services spending in 2008-Q2 so far is up at just a 1.8% annual rate. Real non-durable goods spending is up at a 5.2% rate. Durable goods spending is down at a 2.2% rate. It is not clear that we are getting a strong shot of stimulus to the economy just yet. But Q2 still has one month's worth of data outstanding. Things could improve. In the meantime MFG trends are worsening and housing is continuing to fade. The Q2 outlook remains a challenging one.

1 comment:


Sounds good alright but I do not think it really is.