Consumer Spending Pauses, Expectations Ease: June 26 – 30.

Growth in consumer spending moderated during May as had consumer sentiment in June. Here are the 5 things we learned from U.S. economic data released during the week ending June 30.

#1Personal spending grew at a sluggish pace during May. The Bureau of Economic Analysis estimates real consumer personal expenditures (PCE) grew 0.1 percent during the month following two back-to-back months of 0.4 percent gains. Real spending swelled for both nondurable goods (+0.2 percent) and services (+0.1 percent) but slipped for durable goods (-0.1 percent). Real PCE has increased 2.7 percent over the past year, including a strong +7.0 percent year-to-year gain in durable goods spending. Removing the adjustments for price variability, nominal consumer spending also increased 0.1 percent during the month to $13.214 trillion on a seasonally adjusted annualized basis. Growing at a faster rate were personal income (+0.4 percent), nominal disposable income (+0.5 percent), and real disposable income (+0.6 percent). The latter was the largest single-month gain in real disposable income since April 2015. As a result, the savings rate rose to its highest mark since last September with a 4/10ths of a percentage point increase to +5.5 percent. Finally, the PCE deflator, a closely watched measure of inflation, has grown +1.4 percent over the past year, as did the core PCE deflator (which removes both energy and food from the analysis). Both remained below the Federal Reserve’s 2.0 percent inflation target.Real Disposable Income and PCE-063017

#2One possible reason: Consumers appear a bit less confident about the future. The Conference Board’s Consumer Confidence Index added 1.3 points during June to a seasonally adjusted 118.9 (1985=100), marked by Americans feeling better about current business conditions but less so about conditions in the coming months. The present conditions index surged 5.7 points to 146.3 (approaching the measure’s best reading since 2001) while the expectations index shed 1.7 points to 100.6. 30.8 percent of surveyed consumers felt current business conditions were “good,” compared to 12.7 percent who saw them as being “poor.” Survey respondents also were more positive about labor market conditions as 32.8 percent of consumers said jobs were “plentiful” while only 18.0 percent felt that they were “hard to get.” The press release noted that “[c]onsumers anticipate the economy will continue expanding in the months ahead, but they do not foresee the pace of growth accelerating.”

On the other hand, the University of Michigan’s Index of Consumer Sentiment lost two full points during June to drop to a seasonally adjusted 95.1 (1966Q1=100). This was the measure’s lowest reading since last fall’s election and was the resulting a deteriorating outlook for the future. The expectations index fell by 3.8 points to 83.9 while the current conditions index edged up by 8/10ths of a point to 112.5. As has been the trend with this survey since last November, Republicans were far more positive about current and future business conditions than were Democrats. The press release indicates that the index readings suggest personal spending will grow by 2.3 percent during 2017.

#3Even with another upward revision, Q1 GDP growth was soft. The Bureau of Economic Analysis now estimates Gross Domestic Product grew at a seasonally adjusted annualized rate (SAAR) of +1.4 percent, an improvement from the 1.2 percent gain reported a month earlier and the initial estimate of a 0.7 percent advance. Q1 economic growth was slower than the 2.1 percent and 3.5 percent during the two previous quarters. The most recent upward revision was the product of higher than previously believed levels of personal consumption expenditures (PCE) and exports. The biggest contributors to Q1 GDP growth were nonresidential fixed investment (+123 basis point contribution to GDP growth), exports (+82-basis points), personal consumption expenditures (+75-basis points), and residential fixed investment (+48-basis points). Notable is that the contribution from consumption was down sharply from the previous quarter when PCE added 240-basis points of GDP growth. Also holding back Q1 GDP growth were the negative contributions from private inventory accumulation (-111-basis points), imports (-59-basis points), and government expenditures (-16-basis points). Corporate profits from current production slumped 2.3 percent during Q1 to $2.102 trillion (SAAR). Even with the decline, corporate profits were up 3.3 percent from a year earlier.

#4Economic growth has appeared to have downshifted during May. The Chicago Fed National Activity Index (CFNAI), a weighted average of 85 economic indicators, plummeted by 83-basis points during the month to a seasonally adjusted -0.26. Only 32 of the 85 economic indicators made a positive contribution to the CFNAI. Among the four major categories of indicators, production-related indicators deteriorated by far the most, with its contribution to the headline index falling from +0.53 to -0.16. Also softening from their April contributions were indicators related to employment (down 14-basis points to -0.02) and consumption/housing (off two-basis points to -0.09). The contribution from sales/orders/inventories indicators improved by 3-basis points to +0.02. The three-month moving average for the CFNAI, which smooths some of the month-to-month variability and therefore may be a better indicator of business trends, fell by 17-basis points to +0.04. Nevertheless, the reading above 0.00 suggests that slightly above average economic growth over the past three months (even if the pace of expansion slowed sharply during May).

#5Durable goods orders fell for second consecutive month in May. Per the Census Bureau, new orders for durable goods dropped 1.1 percent to a seasonally adjusted $228.2 billion. This followed a 0.9 percent decline in April. Pulling down the headline measure were large declines in orders for civilian and defense aircraft (-11.7 percent and -30.8 percent, respectively). This resulted in a 3.4 percent decrease in overall transportation goods, even as new orders for vehicles gained 1.2 percent during May. Net of transportation goods, durable goods orders edged up 0.1 percent, its third increase in four months. Orders increased for electrical equipment/appliances (+1.0 percent), machinery (+0.6 percent), and primary metals (+0.3 percent), but fell for computers (-3.2 percent), communications equipment (-3.1 percent), and fabricated metal products (-0.2 percent). A proxy for business investment—civilian capital goods orders net of aircraft—cooled 0.2 percent during May. Durable goods shipments improved for the first time in three months (+0.8 percent). Unfilled orders shrank 0.2 percent while inventories expanded 0.2 percent.

Other U.S. economic data released over the past week:
Jobless Claims (week ending June 24, 2017, First-Time Claims, seasonally adjusted): 244,000 +2,000 vs. previous week; -23,000 vs. the same week a year earlier). 4-week moving average: 242,250 (-9.2% vs. the same week a year earlier).
Pending Home Sales (May 2017, Index (2001=100), seasonally adjusted):  108.5 (vs. April 2017: 109.4, vs. May 2017: 110.4)
Case-Shiller Home Price Index (April 2017, 20-City Home Price Index, seasonally adjusted): +0.3% vs. March 2017, +5.7% vs. April 2016).
Agricultural Prices (May 2017, Prices Received by Farmers, seasonally adjusted): +2.1% vs. April 2017, +4.8% vs. May 2016).

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

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