Personal Incomes Surge More Than Estimates, Spending Accelerates, Inflation Decelerates, Chicago PMI Rises, Factory Orders Healthy, Confidence Down

- Personal Income for July rose .5% versus estimates of a .3% gain and a .4% rise in June.

- Personal Spending for July rose .4% versus estimates of a .3% increase and an upwardly revised .2% gain in June.

- The PCE Core for July rose .1% versus estimates of a .2% increase and an upwardly revised .2% increase in June.

- The Chicago PMI for August rose to 53.8 versus estimate of 53.0 and 53.4 in July.

- Factory Orders for July rose 3.7% versus estimates of a 3.3% gain and an upwardly revised 1.0% increase in June.

- Final Univ. of Mich. Consumer Confidence for August came in at 83.4 versus estimates of 82.5 and an 83.3 prior estimate.

BOTTOM LINE: Consumer spending in the US rose more than forecast in July and inflation cooled, a signal the economy was expanding at the start of the third quarter, Bloomberg reported. Incomes rose .5% in July, the most in four months, versus a .4% gain in June. The PCE core, the Fed’s favorite inflation gauge, rose less than expected in July and is within the Fed’s comfort zone at 1.9% year-over-year. The savings rate rose to .7% versus .5% the prior month. The better-than-expected PCE core gives the Fed more leeway. I still think a 25 basis point cut is likely at the upcoming meeting.

US business activity unexpectedly rose in August, suggesting that companies continue to expand amid the sell-off in credit markets, Bloomberg said. The new orders component of the index rose to 58.4 from 53.4 the prior month. Many companies still have the ability to increase spending without new borrowing, due to the historical string of profit growth increases over the last few years, according to economists. The inventories component fell to 44.6 from 55.1 in July. The order backlog component rose to 38.8 from 37.4 the prior month. The prices paid component fell to 71.8 in August from 73.1 prior. I continue to believe manufacturing will help boost US growth over the intermediate-term as companies rebuild depleted inventories on rising confidence in the sustainability of the current expansion.

Orders placed with US factories rose more than forecast in July as customers bought more aircraft, machinery and electronics, Bloomberg reported. Orders for durable goods, which make up over half of factory demand, surged a revised 6% in July versus a 1.8% gain the prior month. This gain was paced by a 7% gain in orders for computer and electronic equipment. July orders for capital goods excluding aircraft and military equipment, a gauge of future business investment, gained 1.7% after falling .2% the prior month. Orders for automobiles surged 11%, the most since January 2003. At July’s sales pace, the amount of goods on hand is 1.21 months’ worth versus 1.24 months worth in June. Factory Orders should remain healthy over the intermediate-term.

Confidence among US consumers fell less than economists had previously expected in August. The expectations component of the index came in at 73.7 versus 81.5 in July. The current conditions component came in at 98.4 versus 104.5 prior. Consumers now expect inflation to rise 3.2% in one year versus expectations in July of a 3.4% gain. The average price of regular gasoline fell to $2.75/gallon in August versus $2.86/gallon in July. I continue to believe consumer confidence will rebound back to cycle highs over the intermediate-term as housing fears subside, the job market remains healthy, wages continue to substantially outpace inflation, interest rates remain historically low, inflation decelerates further and stocks resume their major uptrend.