Incomes Rise, Spending Jumps, Inflation Decelerates, Manufacturing Healthy, Construction Spending Rebounds, Confidence Still Low

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

- Personal Spending for August rose .6% versus estimates of a .4% gain and a .4% increase in July.

- The PCE Core for August rose .1% versus estimates of a .1% gain and a .1% increase in July.

- The Chicago Purchasing Manager Index for September rose to 54.2 versus estimates of 53.0 and 53.8 in August.

- Construction Spending for August rose .2% versus estimates of a .3% decline and a downwardly revised .5% decline in July.

- Final Univ. of Mich. Consumer Confidence for September fell to 83.4 versus estimates of 84.0 and a reading of 83.8 in August.

BOTTOM LINE: Consumer spending in the US rose more than forecast in August, despite the credit market turmoil, and real consumer spending rose the most in more than 2 years, Bloomberg reported. Moreover, the core PCE, the Fed’s favorite inflation gauge, rose 1.8% year-over-year, the smallest gain since February 2004. This inflation gauge is also well below the long-term average of 2.5%. Inflation-adjusted spending on durable goods, autos, furniture, and other long-lasting items, surged 2.8%. Receipts at automobile dealerships and parts stores rose the most since July 2006. Considering the gloom and doom perpetuated 24-7 in almost every media outlet during the month of August, the consumer spending number was very impressive. As well, the 10-year yield is falling another 3 basis points today as investors continue to ratchet down long-term inflation expectations. I still think inflation worries have peaked for this cycle and the long-term trend of disinflation remains firmly in tact, despite the rise in commodities and decline in the dollar which are being driven mostly by investment fund speculation. I expect consumer spending to remain relatively healthy over the intermediate-term as sentiment improves, housing fears subside, inflation continues to decelerate, interest rates remain low, the job market stays healthy, the unemployment rate remains historically low and stocks continue their major bull run.

US business activity accelerated more than expected this month as production and employment expanded and a measure of prices companies paid fell to the lowest since January, Bloomberg reported. The new orders component of the index fell to 56.2 from 58.4 in August. The inventories component fell to 38.2 from 44.6 the prior month. The order backlogs component jumped to 50.5 from 38.8 in August. The prices paid component plunged to 59.0 from 71.8 the prior month. Moreover, the NAPM-Milwaukee Index soared to 70, the highest on record going back to 1998. As well, the New Orders component of this index jumped to 81, also the highest on record. I continue to believe manufacturing will help boost overall US growth over the intermediate-term as companies gain confidence in the sustainability of the current expansion and rebuild depleted inventories.

The final reading on consumer confidence for September came in slightly below estimates, Bloomberg reported. I expect consumer sentiment to rebound sharply during the fourth quarter as stocks make new record highs, energy prices fall and housing fears subside to an extent. I still expect both main gauges of sentiment to rebound back near cycle highs over the intermediate-term.