U.S. Personal Numbers - Inflation Heading To Fed Target
- We've studied the personal expenditure, personal income and inflation faced by personal expenditure numbers for the U.S. and it looks like - absent external effects - everything is going to plan.
- Inflation is, finally, rising to the Federal Reserve target so we'd not expect, again absent external effects, any change in policy.
- Of course we do have an external effect, that cornoavirus, and the Fed has stated that they will change policy if necessary.
Our basic background here
We have two different reasons to be interested in these personal indicators from the BEA. By personal indicators I mean personal income, personal expenditures and the inflation rate faced by people given their patterns of expenditure. One reason is our by now traditional attempt to read what the Federal Reserve might do to monetary policy. Are they going to raise interest rates, lower them, what?
The other is that we know there's this external shock coming to the economy - the coronavirus one. We don't know how bad it's going to be although my own insistence is short even if sharp. But one thing to worry about is that if we've got something on the verge of going wrong in the domestic economy then this external shock could - would - be the thing that tipped it over the edge. For example, consider if the economy is already under strain for other reasons then this could be the tipping point for things to go really wrong. If we're actually just copacetic in our domestic set up then once the shock has passed we should get back to normal pretty quickly.
My reading of these numbers is that we're doing just fine. Therefore any shock from Corvid-19 will indeed be short.
For us as investors that means looking, watching, for over-reaction and using that as a time to buy in cheap.
We have the BEA release itself:
Personal income increased $116.5 billion (0.6 percent) in January according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $101.4 billion (0.6 percent) and personal consumption expenditures (PCE) increased $29.6 billion (0.2 percent).
Real DPI increased 0.5 percent in January and Real PCE increased 0.1 percent. The PCE price index increased 0.1 percent. Excluding food and energy, the PCE price index increased 0.1 percent.
That doesn't necessarily mean a great deal to most of us, so let's take it in steps.
This is the change in what people are actually spending out there:
Real consumer spending growth remained modest in the first month of the year. Real spending grew 0.1% following growth of 0.1% in December and 0.2% in November. Weakness was broad-based, although warm weather weighed on utility spending and contributed to the softness.
As I never tire of pointing out, we've got a system where warm weather - which means we have to spend less on keeping warm - is regarded as making us poorer. An odd way to do it, but that is the way we do.
(Personal consumption expenditure from Moody's Analytics)
But those numbers. Consumers are increasing their spend gradually, aggregate demand from this source is thus rising. We're not on the lip of any recession of anything therefore.
The same release gives us personal income:
Income growth was strong at the beginning of the year. Nominal personal income jumped 0.6% in January, above the Moody's Analytics forecast of a 0.4% gain and the consensus expectations of a 0.3% increase. However, December's meager increase was revised lower from 0.2% to 0.1%. Nominal disposable income also increased 0.6% in January, following a small 0.1% gain in December. Among the components of personal income, compensation of employees, proprietors' income, transfers, and receipts on assets all logged steady gains in January. The personal saving rate increased from 7.5% in December to 7.9% in January.
That's a longer quote there because it shows us something about that warmer weather.
(Personal incomes from Moody's Analytics)
So incomes are rising nicely, meaning that that rise in expenditure has no reason to end any time soon. That's great - our growth is sustainable as far as household balance sheets are concerned. People aren't taking on debt to finance simple consumption, that is.
In fact, as we can see from the savings rate, the opposite is happening. People are saving more. Part of that being the warmer weather meaning that people can spend less on utilities. Which is why it's off to think that we've a system that regards this as us getting poorer.
We've also got the price changes being faced by this personal expenditure:
Consumer price growth slowed in January but provided the Federal Reserve some good news, as year-ago price growth inched closer to its 2% target. The headline PCE deflator rose 0.1% in January, which resulted in a 1.7% increase compared with a year earlier. The core PCE deflator also increased 0.1% for the month, with year-ago growth rising modestly to 1.6%.
The PCE deflator is not exactly and entirely the same as the PCE index, but it's a lot closer than the CPI is. As it happens we do have that year on year core PCE as well and that's 1.7%. The importance of this is that it's the Fed's preferred measure of inflation, the one they're trying to get to 2%.
Putting this together
A reasonable reading of these numbers is that, purely considering the domestic economy, the US is doing just fine. Incomes are going up, spending is, inflation is gently rising to target. Looking at this, purely as this, we would therefore expect no change in economic or monetary policy.
However, as we know, we're not dealing just with domestic issues. There's that possible pandemic hitting our shores. This will have an effect.
The thing is, well, what? My reading of this is that with a reasonable domestic economy whatever effect might be sharp but it will be short. The economy will bounce back quickly from any effects given that underlying strength.
The investor view
I would thus suggest that we should look at coming events as a blip. We've already seen markets drop on pandemic fears. We've also already seen that Chinese factories are reopening, they expect to be at least 90% back in a few weeks. So the effect is going to be short term. We should thus be looking at any further market falls - if they happen - as being buying opportunities.
Whenever a market does correct - for whatever reasons - there's a difference in the recovery. We usually - near always in fact - find that the price of risk rises. That means - risk being the inverse of a stock price in this sense, like yield and a bond price - riskier stocks take more of a beating than more stable operations. Another way to put the same thing is that the froth comes off the more speculative positions. The more solid stocks benefit more from the recovery.
So the place to go looking when we do think we've got the bottom of this blip is in the solid dividend-paying stocks. Use it as an opportunity to get into those at a better price than was available before. As the recovery gains pace, then there's time to look at the others, as that risk premium falls again.
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