Personal Incomes Rise, Spending Decelerates, Confidence Increases and Chicago Manufacturing Surges

- Personal Income for August rose .3% versus estimates of a .3% gain and a .5% increase in July.
- Personal Spending for August rose .1% versus estimates of a .2% increase and a .8% gain in July.
- The PCE Core for August rose .2% versus estimates of a .2% increase and a .1% gain in July.
- Final Univ. of Mich. Consumer Confidence for Sept. rose to 85.4 versus estimates of 85.0 and a reading of 84.4 in August.
- The Chicago Purchasing Manager Index for Sept. rose to 62.1 versus estimates of 55.7 and a reading of 57.1 in August.

BOTTOM LINE: Consumer spending in the US rose .1% last month, Bloomberg reported. This comes on the heels of a .8% surge in July. Disposable income rose .4% and is now 8.8% higher from year-ago levels, almost three times the rate of inflation. The core pce, the Fed’s favorite inflation gauge, rose .2%. I expect consumer spending to accelerate over the next few months as stocks rise more, interest rates remain low, sentiment improves, energy prices fall further and the job market remains healthy. I expect the core pce to decelerate over the intermediate-term.

Falling gasoline prices pushed confidence among American consumers to the highest level in five months in September, Bloomberg reported. The expectations component of the index, which economists link to future consumer spending, surged to 78.2 from 68 the prior month. Consumers expect inflation to moderate to 3.1% over the next 12 months versus expectations of a 3.8% gain in the prior survey. The average price of a gallon of regular gasoline fell to $2.34 on Sept. 27 from $2.79 at the end of August, according to the American Auto Assoc. 33% of Americans said they are spending more on other goods after the fall in gas prices, a recent Bloomberg survey showed. A 7.7% gain in Americans’ wages during the second quarter is also boosting sentiment. I still expect consumer sentiment to reach new cycle highs over the intermediate-term as stocks rise, inflation decelerates, energy prices continue to decline, interest rates remain low, housing stabilizes at relatively high levels, the job market remains healthy and irrational pessimism lifts further.

Manufacturing in the Chicago area unexpectedly accelerated this month to the highest since July 2005 as new orders picked up, Bloomberg said. Strong profits, rising confidence, falling energy prices and inventory rebuilding are spurring companies to boost production. The new orders component of the index jumped to an 11-month high of 67.3 from 59.6 the prior month. The prices paid component of the index fell to 69.8, the lowest in 13 months from 75.2 the prior month. The Chicago Fed said its district makes 40% of US motor vehicles. I am surprised by the strength in Chicago manufacturing considering auto production cutbacks. Plunging energy prices are so far offsetting this. I will closely monitor the ISM Manufacturing report next week.