Personal Incomes Rise, Spending Decelerates, Inflation Tame, Purchasing Manager Declines, Consumer Confidence Surges to Cycle Highs

- Personal Income for June rose .4% versus estimates of a .5% gain and a .4% increase in May.

- Personal Spending for June rose .1% versus estimates of a .1% increase and an upwardly revised .6% increase in May.

- The PCE Core for June rose .1% versus estimates of a .2% increase and a .1% gain prior.

- The 2Q Employment Cost Index rose .9% versus estimates of a .9% gain and a .8% increase in 1Q.

- The Chicago Purchasing Manager Index for July fell to 53.4 versus estimates of 58.4 and a reading of 60.2 in June.

- Consumer Confidence rose to 112.6 in July versus estimates of 105.0 and an upwardly revised 105.3 in June.

- Construction Spending for June fell .3% versus estimates of a .2% rise and an upwardly revised 1.1% gain in May.

BOTTOM LINE: Personal spending in the US increase in June, while a gauge of inflation rose less than forecast, suggesting price pressures are easing, Bloomberg reported. While personal spending decelerated, it is rising around average rates over the last three months. As well, personal income growth continues to trend above long-term average rates. The core PCE, the Fed’s favorite inflation gauge, rose just 1.9% year-over-year. This is the smallest increase since March 2004 and within the Fed’s comfort zone of 1-2%. As I have steadfastly said over the past couple of years, I believe we have experienced a mild cyclical uptick in inflation of late, but the secular trend of disinflation remains firmly in tact.

Employment Costs in the US rose at a faster pace in the second quarter as companies spent more on employee benefits, Bloomberg said. Companies are offering better benefit packages to retain skilled employees at a time when the jobless rate has hovered near a six-year low. Strength in the job market has continued to boost consumer spending even as gas prices stay high. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

A measure of US business activity fell more than forecast in July, Bloomberg reported. The New Orders component of the index fell to 53.4 versus 65.7 the prior month. The Inventories component fell to 55.1 versus 55.9 the prior month. The Prices Paid component rose to 73.1 versus 68.1 the prior month. This gauge had been at very strong levels over the last few months. I suspect it will bounce higher next month.

Consumer confidence in the US soared to a new cycle high in July, spurred by job and income growth and lower gas prices, Bloomberg reported. The Present Conditions component of the index rose to 139.2 from 129.9 the prior month. The Expectations component for the next six months rose to 94.8 versus 88.8 the prior month. The percentage of people saying jobs are plentiful rose to 30.5%, the highest since August 2001, from 27.6% the prior month. The proportion of consumers that said jobs are hard to get fell to 18.4% from 20.5% the prior month. The proportion of Americans that think business conditions are poor is only 14.4%, down from 16.1% the prior month. Those planning to buy an automobile rose to 7.2% versus 6% of consumers the prior month. Consumers in the Central Northeast region are now the lone bastion of extreme pessimism. Confidence in the Central Northeast region came in at a depressed 76.80, notwithstanding recent stock gains, near the level seen at the major bear market lows during 2002. As I forecast early in the year, this measure of confidence reached a new cycle high. I suspect the other main gauge of consumer sentiment will hit a new cycle high this fall as energy prices falling meaningfully, inflation decelerates to low rates, interest rates remain low, housing fears subside, stocks rise further, wage growth continues to substantially outpace inflation and unemployment remains historically low.

Spending on US construction projects unexpectedly fell last month as cutbacks in residential construction surpassed gains in non-residential projects, Bloomberg said. The prior month was revised higher. Private residential construction fell .7%, the 16^th consecutive decline. Non-residential construction rose .1% and was up 14% from year-ago levels. The drag from housing has been diminishing since reaching a 25-year high of 1.3 percentage points of GDP during the third quarter of last year. I continue to believe construction will remain muted over the intermediate-term as homebuilders work down inventories.