Incomes/Spending Rise Less Than Estimates, Inflation Decelerates Further, Chicago Manufacturing Strong, Construction Jumps, Confidence Revised Higher

- Personal Income for May rose .4% versus estimates of a .6% gain and a -.2% decline in April.

- Personal Spending for May rose .5% versus estimates of a .7% increase and a .5% gain in April.

- The PCE Core (MoM) for May rose .1% versus estimates of a .1% gain and a .1% increase in April.

- The Chicago Purchasing Manager Index for June came in at 60.2 versus estimates of 58.0 and a reading of 61.7 in May.

- Construction Spending for May rose .9% versus estimates of a .1% gain and a .2% increase in April.

- The Final Univ. of Mich. Consumer Confidence reading for June rose to 85.3 versus estimates of 84.0 and 83.7 in May.

BOTTOM LINE: Americans spent less than forecast in May and the Fed’s preferred inflation gauge cooled, Bloomberg reported. The Core PCE, the Fed’s favorite inflation gauge, rose 1.9% from a year earlier, the smallest gain since March 2004. This is also well below the 20-year average of 2.5% and within the Fed’s comfort zone. Consumer spending will come in below average rates this quarter, however spending should substantially exceed estimates of 2.5% in the second half of the year as interest rates come back down, energy prices fall substantially, sentiment improves, inflation decelerates further, stocks rise further, incomes continue to outpace inflation and housing sales stabilize at relatively high levels.

A measure of US business activity unexpectedly held near a two-year high this month, suggesting business spending will support continued growth, Bloomberg reported. The Prices Paid component fell to 68.1 from 70.2 in May. The Employment component of the index fell to 52.7 from 57.3 the prior month. The New Orders component fell to 65.7 from 71.1 the prior month. I continue to believe manufacturing will help boost US growth back to 3%+ this quarter.

Spending on US construction projects rose more than forecast last month as work on non-residential and government projects helped overcome cutbacks in homebuilding, Bloomberg said. The .9% increase was the biggest gain since February 2006. Every category besides residential construction showed an increase, spurred by the building of factories and utilities. I still expect construction spending to trend below average rates as homebuilders further pare down inventories and commercial construction slows modestly.

Confidence among US consumers came in above the level economists had expected for June, Bloomberg reported. While the average price of gas has fallen to $2.97/gallon from the record $3.23/gallon on May 23, it is still 28% higher this year. Consumers believe inflation will rise 2.9% over the next five years, down from 3.1% the prior month. I continue to believe both main gauges of consumer sentiment will rebound back near cycle highs before year-end.