Could US Personal Spending Rise In The First Quarter?

Given the historical analysis of business cycles, could it be that we are starting to see the first 2 elements kick in?

Residential Investment (RI) is the first thing to turn, followed by PCE. RI has shown a few faint (and yes the operative word is “faint”) signs of life. The increase in starts was not something I am happy about, but it will lead to higher RI, and we have seen both existing and new home sales up with inventories declining for new homes and flat for existing.

Obviously we are very deep in the valley, but no longer seem to be descending. Yes, I know - the new home sales numbers are about as inexact as you can find in a data series (seriously - up 4.7% M/M but that is plus or minus 18.3%, so you can be 90% confident that sales were between -13.6% and +23.0%), but it is the only data we have on it, and January was revised up. This could lead to RI being less of a drag on GDP - not that it is going to be booming - but the absence of a negative is a positive.

Friday morning’s news on personal income and spending shows that there is a good chance that Personal Consumption Expenditures (PCE) will rise slightly in the 1st quarter, based on the first 2 months of data. Now it looks like PCE will be a net gain rather than a huge negative (see chart below; larger version available at http://www.calculatedriskblog.com/).

January PCE was revised up from up 0.6% to up 1.0%, and the initial read for February was an increase of 0.2%. This means that PCE was 1.84% higher in January than in October, while it was just 0.28% lower in February than in November.

Given that December was a truly crappy month for PCE, it is likely that March will be higher than December. Average the 3 of them together (we just have 2 of the 3 now) and you will have PCE for the 1st quarter.

PCE is an extremely important component of GDP, and the prospect that it might be up in the 1st quarter, rather than down 4.3% like it was in the 4th quarter, has to make everyone rethink their outlook for the 1st quarter Then add in core capital goods orders, which is the proxy for Equipment & Software investment: up 6.6% in February (after a series of horrifying declines, to be sure). This last number is very good news for the capital goods companies.  Think firms like Caterpillar (NYSE:CAT) and Emerson Electric (NYSE:EMR).

Not all was sweetness and light in the report. Personal income fell 0.2%, reversing a 0.2% gain in January. The gain in January was mostly due to a big increase in transfer payments - most significantly the big cost-of-living adjustment in Social Security payments (5.6%).

With income falling and spending rising, it is not a shock that the personal savings rate fell back a bit, to 4.2% from 4.4% in January. Over the long run, we desperately need the savings rate to increase, but right now it is the last thing we want to see. Thus, this slight retracement of the savings rate is probably a good thing.

In any case, the savings rate is far above where it was a few years ago, when it actually went negative. On the other hand, eventually we will want to see it rise back up to the 8%+ range it was in prior to the mid-1980’s. Ideally, we will get there by income rising faster than spending rather than spending falling faster than income.

Long-term challenges to the economy remain (Noah: “It looks like rain”). Yes, unemployment is headed much higher - even if initial claims continue to stabilize at -650,000 or so, there is not much uptake on the other side, and thus continuing claims continue to rise (over 5.5 million and setting new records every week).

I’m not at all saying that we are going to boom or anything in the near future, but hey - can’t we be happy to see a few signs that the worst dystopian views of the future, of a perpetual downward spiral in the economy, will not come to pass?

These are still just straws in the wind, based on volatile data series that can be significantly revised. There is still much pain in our economic future - corporate profits are going to be very ugly in the 1st and 2nd quarters. Still, perhaps these numbers are the recession’s El Al’Emain - not the beginning of the end, but at least the end of the beginning.

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