Spending/Incomes Decelerate, Chicago PMI Production Jumps Most Since 2004, Confidence Improves

- Personal Spending for July rose .2% versus estimates of a .2% gain and a .6% rise in June.

- Personal Income for July fell .7% versus estimates of a .2% decline and a .1% rise in June.

- The PCE Core for July rose .3% versus estimates of a .3% gain and a .3% increase in June.

- The Chicago Purchasing Manager for August rose to 57.9 versus estimates of 50.0 and a reading of 50.8 in July.

- Final Univ. of Mich. Consumer Confidence for August rose to 63.0 versus estimates of 62.0 and a prior estimate of 61.7.

BOTTOM LINE: Spending by US consumers slowed in July, Bloomberg reported. The PCE Core, the Fed’s preferred inflation gauge, rose 2.4% from year-ago levels, the most since February of last year. I expect spending and income growth to improve over the coming months and inflation to decelerate meaningfully.

A measure of US business activity in August showed expansion at the fastest pace in more than a year, as production accelerated the most since October 2004, Bloomberg reported. 50.0 is the dividing line between expansion and contraction. The index averaged 54.4 in 2007. The New Orders component of the index surged to 60.2 from 53.5 in July. The Production component jumped to 63.4, the highest since June 2007 and the biggest jump since October 2004, versus 49.2 in July. Order Backlogs soared to 63.0 from 45.7 in July. The Employment component fell to 39.2 from 45.9 in July. The Inventories component fell to 52.2 from 54.9 the prior month. The Prices Paid component fell to 80.6 from 90.7 in July. I expect the ISM Manufacturing Index for August, released next Tuesday, to exceed estimates of 49.6. I still expect manufacturing to continue to expect at modest levels over the intermediate-term on inventory rebuilding and better-than-expected demand. As well, the Prices Paid component has likely already made a long-term top.

Confidence among US consumers came in better than economists’ expected in August. The average cost of a gallon of gas peaked at $4.11 on July 16, according to AAA, versus $3.67/gallon yesterday. The Expectations component rose to 57.9 from 53.5 the prior month. The Current conditions component fell to 71.0 versus 73.1 the prior month. I still believe Consumer Confidence has bottomed and will improve meaningfully over the intermediate-term as energy prices fall, inflation decelerates, housing fears subside, election uncertainty ends, the job market improves, stock prices rise and interest rates remain low.