Personal Income/Spending Surges, Core PCE Above Estimates, Chicago PMI Jumps Most on Record, Confidence Slightly Below Estimates

- Personal Income for February rose .6% versus estimates of a .3% gain and a 1.0% rise in January.
- Personal Spending for February rose .6% versus estimates of a .3% gain and a .5% rise in January.
- The PCE Core for February rose .3% versus estimates of a .2% gain and a .2% rise in January.
- The Chicago Purchasing Manager Index for March rose to 61.7 versus estimates of 49.3 and a reading of 47.9 in February.
- The Final Univ. of Mich. Consumer Confidence reading for March fell to 88.4 versus estimates of 88.5 and a prior estimate of 88.8.

BOTTOM LINE: Consumer spending and incomes rose more than expected last month, Bloomberg reported. The report suggests the US economy will continue to weather the slump in housing. The PCE Core for February, the Fed’s favorite inflation gauge, rose 2.4% year-over-year versus a 2.2% rise in January. I continue to believe consumer spending is accelerating into the spring as income growth substantially outpaces inflation and Americans’ median net worth is at all-time high levels.

A gauge of US business activity unexpectedly expanded this month at the fastest pace in almost two years, signaling the economy may be gaining momentum heading into the second quarter, Bloomberg said. The increase was the largest since at least 1968 when record-keeping began. Readings greater than 50 indicate expansion. A surge in orders and production gains point to the US economy overcoming the drag of housing on manufacturing. The New Orders component of the index also gained the most in history, soaring from 48.7 to 72.2. The Inventories component of the index fell to 48.8 from 54.5, which shows inventories are falling. The Employment component of the index fell to 45 from 50.6 the prior month. The Prices Paid component fell to 59.1 from 63.2 the prior month. I continue to believe the worst of the manufacturing slowdown is over and that inventory rebuilding in the second quarter will help boost overall economic growth.

US construction spending unexpectedly rose last month by the most in almost a year, as work increased on factories, commercial buildings and highways, Bloomberg said. Commercial and government-funded construction spending more than offset the drag from declining residential construction. Non-residential construction, including public projects rose 13.6% year-over-year in February. Private non-residential construction is being supported by corporate hiring that has resulted in increased demand for office space and decreased vacancy rates. I expect residential construction spending to remain a drag on overall construction throughout the year, notwithstanding February’s increase.

Consumer confidence fell slightly more than expected in March as gas prices rose, Bloomberg reported. The current conditions component of the index fell from 103.5 from 106.7 in February. Gasoline prices rose to $2.59/gallon on March 26 from $2.40 at the end of February. While recent confidence readings have declined modestly, consumer spending appears to be accelerating as unemployment remains low and wages outpace inflation. I still expect confidence to make new cycle highs later this year as gas prices fall, interest rates remain low, inflation decelerates further, the job market remains healthy, housing sales stabilize at relatively high levels and stock prices rise further.