Personal income and outlays both rose at a solid, inflation-adjusted 0.4% pace in January while revisions to November and December were largely offsetting. Together, the data affirm our view that Main Street’s immune system has strengthened, making it more resistant to what ails Wall Street. Gains in wages and salaries and rental income drove overall income gains. Spending gains were concentrated in big-ticket durable goods, which includes everything from large SUVs to housing-related purchases. Spending on services picked up after a lull late last year, probably reflecting an unusually steep increase in health insurance premiums at the start of the year. The saving rate held at 5.2%, which suggests that the fear factor we saw in financial markets remained somewhat contained in January.
The personal consumption expenditures (PCE) index, which more accurately tracks inflation than the Consumer Price Index (CPI), rose 0.1% during the month, despite further declines in energy prices. Nondurable goods prices (think: clothing) were also lower with heavy discounting during the month. Services inflation, however, continued to move higher. Core (nonfood and energy) PCE jumped 0.3% during the month, rising more than expected, 1.7%, from a year ago. Moreover, the core PCE was revised up slightly for December, which should reassure voting members of the Federal Open Market Committee (FOMC) that deflation is not the primary risk to the U.S. economy at this stage of the game.
Separately, consumer sentiment firmed in the latter half of February, another sign of the resilience of Main Street over Wall Street. Small improvements were seen in both current economic conditions and expectations. Those measures are still off a bit from the start of the year but remain consistent with solid consumer spending gains.
Bottom Line: Federal Reserve officials who have taken a beating for turning a deaf ear to Wall Street’s cries are probably feeling vindicated today. The Fed is still wedded to Wall Street, however, and needs to improve communications to avoid a messy breakup. Our forecast holds for no recession and two rate hikes this year in June and December.