Spending and income numbers are telling two very different stories. The latest economic news continues to provide an inconsistent view of the strength in the economy.
The Week That Was
Friday’s report on consumer spending, incomes, and inflation reaffirmed the strength reported in the third quarter GDP numbers on Thursday.
September consumer spending rose at a 9 percent annual rate and 8 percent over the past three months. September real (inflation-adjusted) consumer spending rose at a 4 percent annual rate in both the latest month and over the past three months. Inflation remains in the 4 percent vicinity.
Judging from the spending side of the economy, the boom is alive and well going into the fourth quarter.
The income side of the economy tells a different story. September personal income, the broadest measure of the economy from the income side, has slowed to a 4 percent annual rate for the most recent month, as well as for the past three and sixmonths. Real disposable incomes are flat to down over these same time periods.
The spending and income sides of the economy should be equal. Hence, one side or the other of these reports is wrong, or both are wrong and the truth lies somewhere in the middle. We suspect the slowdown indicated by the productive side of the economy is more accurate. The signs of a boom are more likely a final splurge among hard-pressed consumers.
Things to Come
This week’s economic news will include Wednesday’s Federal Reserve monetary policy announcement. The Fed will announce another pause in interest rates. What is unknown, but more important to the future of the economy, is whether the Fed will continue to sell securities, and at what rate. Given the latest reports of high inflation in the vicinity of 4 percent, we expect the Fed to continue selling securities, tightening the money supply.
On Wednesday and Friday, ISM and S&P will report on October business surveys. S&P’s advance survey for October shows the economy still in the vicinity of break-even with readings close to 50. ISM’s September survey showed service company new orders at 52, but the composite was at a strong reading of 59. Business surveys have yet to recognize any significant downturn in the economy.
Friday’s employment report is likely to continue to show job gains. Employment is a lagging indicator. With much of the economy still close to break-even, the scarcity of workers has
businesses retaining those it has and hiring those it needs.
Money, Money, Money
Fed members have all but committed not to raise interest rates at the November 1 meeting. Given the latest signs of persistent inflation, we expect the Fed to reaffirm a willingness to raise rates at future meetings. We also expect the Fed’s governors to continue selling securities, which will further tighten monetary policy.
Market Forces
Stocks moved broadly lower last week, with all major indexes down 1 percent to 2 percent. Technical indicators remain extremely bearish.
Other than the Nasdaq, which is approaching a major support level, other major indictors are now all below support at their 200-day averages.
Most economic reports suggest the economy continues to boom, with inflation remaining in the 4 percent vicinity. These reports hold the potential for interest rates to move still higher and remain high for a longer period.
For reasons described below, we do not believe the economy is booming. The economy is weakening and will weaken further in response to ongoing monetary restraint.
Recent signs from sensitive indicators such as stock prices and housing activity point to further problems ahead. As noted in our recent forecast, interest rates can still move higher. We are tentatively encouraged with recent yields on 10-year T-Notes holding below 5.0 percent while the latest headlines show a booming economy with persistently high inflation.
The potential for further downward pressure on stock prices continues.
Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 10 percent
Monetary Policy: restrictive
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