Incomes Strong, Spending Brisk, Inflation Contained, Manufacturing Surges

- Personal Income for March rose .8% versus estimates of a .4% gain and a .3% rise in February.
- Personal Spending for March rose .6% versus estimates of a .4% increase and a .2% rise in February.
- The PCE Core(M-o-M) for March rose .3% versus estimates of a .2% rise and a .1% gain in February.
- Construction Spending for March rose .9% versus estimates of a .4% gain and a 1.0% rise in February.
- ISM Manufacturing for April rose to 57.3 versus estimates of 55.0 and a reading of 55.2 in March.
- ISM Prices Paid for April rose to 71.5 versus estimates of 70.0 and a reading of 66.5 in March.

BOTTOM LINE: Americans increased spending more than expected in March, encouraged by higher wages that more than offset higher energy prices, Bloomberg reported. The core PCE, the Fed’s favorite inflation gauge, rose more than expected, but is still only 2% higher from the same month in 2005. Moreover, personal incomes are up 6% from a year ago, twice the amount of most inflation measures. This helps explain Wal-Mart’s(WMT) very strong 6.8% April sales gain even as gas prices surged. I expect income growth to remain healthy over the intermediate-term, while spending will likely slow to average rates.

Construction spending in the US rose twice as much as forecast in March as homebuilding remained strong and local governments spent more on hospitals and police stations, Bloomberg reported. I expect construction spending to decelerate through year-end as the effects of hurricane rebuilding subside and homebuilding slows.

Manufacturing growth in the US accelerated last month as companies stepped up production to meet demand, Bloomberg said. The new orders component of the index fell to 57.6 from 58.4 the prior month. The employment component of the index rose to 55.8 versus 52.5 the prior month. I expect manufacturing to slow back to more average levels through year-end as inventory rebuilding subsides and demand slows.