Gary D. Halbert

Between the Lines

How about some good economic news for a change? The Commerce Department reported on Tuesday morning that consumer spending in April rose by the most in almost seven years.

Personal spending, which measures how much Americans paid for everything from raincoats to meals at restaurants, increased 1.0% in April from a month earlier, the Commerce Department reported this week. That was the biggest one-month jump since August 2009.

Part of the reason for the higher than expected spending in April was the flat reading in March, so some rebound was expected in April. The pre-report consensus was for a jump of 0.7%, so the reading of 1.0% was a pleasant surprise.

Consumer spending accounts for more than two-thirds of economic output (ie – GDP) in the US and has been a driving force behind the economic expansion for more than five years. But consumers had been steadily pulling back since mid-2015, one factor behind the paltry economic growth in the 1Q of this year.

You may recall that the Commerce Department initially reported in late April that 1Q GDP expanded by a disappointing annual rate of only 0.5%. Last week, in its second estimate, the government revised 1Q GDP up to 0.8%, still nothing to shout about.

Based on Tuesday’s report showing consumer spending up 1% in April, it now looks like the economy is picking up steam again, following a familiar pattern of a gloomy winter leading into a brighter spring as we’ve seen in the last few years.

This is good news for the economy as solid employment, firming wage growth and upbeat confidence should support economic momentum in the second half of the year, barring any negative surprises. Still, most forecasters expect GDP growth of only 2.0%-2.5% for this year.

Tuesday’s report also showed steady gains in personal income in April, up a solid 0.4% over March, suggesting that the labor market remains robust with some signs of firming inflation. Fed officials are watching those key metrics as they weigh another move on the central bank’s benchmark interest rate.

The solid rebound in consumer spending in April will likely be interpreted at the Fed as a key indication that the economic recovery has regained its footing after the disappointing 1Q. Consumer spending on durable goods was particularly robust in April, likely reflecting healthy auto sales during the month.

Americans had been socking away more money in savings this year but now appear a little more confident about spending some of it. The personal saving rate in April was 5.4%, down from March’s 5.9% and the lowest level of the year.

Relatively low inflation, meanwhile, has helped bolster consumer sentiment. Even with signs inflation is firming, price rises remain muted. The Personal Consumption Expenditures Price Index (PCE), the Fed’s preferred inflation measure, rose 0.3% in April from the prior month, the firmest reading since May 2015. From a year earlier, the Index climbed 1.1%, undershooting the Fed’s 2% target for the 48th straight month.

So-called “core” prices, which exclude the volatile categories of food and energy, rose 0.2% from the prior month and 1.6% from a year earlier. While this is still below the Fed’s stated 2% target for core PCE inflation, it will likely give the Fed the reassurance to raise the Fed Funds rate when it meets on June 14-15 or on July 25-26.

Most Fed-watchers continue to believe that the policy-setting committee will vote to raise the key Fed Funds rate range by another one-quarter percent to 0.50%-0.75% when it meets on June 14-15.

Yet others now suggest the Fed will wait to see the outcome of Great Britain’s June 23 vote on whether to leave, or stay in, the European Union, and wait until the July 25-26 policy meeting to hike the Fed Funds rate.

FYI, the latest polls in Britain taken last weekend show that public sentiment in Britain has now shifted toward leaving the European Union – the so-called “BREXIT” – by a narrow margin (52-48), which could lead to a lot of volatility in the US and global financial markets.

In any event, I think it’s safe to assume a rate hike will happen at one of the next two FOMC meetings. I think it’s also safe to assume the rate hike will once again be bearish for equities. As a result, I recommend reducing exposure to “long-only” (buy-and-hold) equity strategies by at least 50%.

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