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By HaleStewart October 16, 2014 8:13 am
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U.S. Consumer Spending At A Moderate But Sustainable Pace

     The latest market correction has attracted a great deal of attention.  And, it has once again placed a great deal of focus on the underlying economic condition of the US economy.  As I noted yesterday, both the leading and coincident economic indicators (which comprise a total of 14 different economic statistics) are pointing to continued moderate US growth.  This analysis is supported by the Beige Book, which was released yesterday:

Reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book. Moderate growth was reported by the Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while modest growth was reported by the New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts. In the Boston District, reports from business contacts painted a mixed picture of economic conditions. In addition, several Districts noted that contacts were generally optimistic about future activity.

     The one area of concern among commentators has been retail sales. 

For the last two years, the year over year percentage change has been fluctuating around the 2.5% level.  But, there was a big dip at the beginning of the year.  In addition, the data series has a slight downward trend, which is causing some concern.  (The above chart does not contain the .3% M/O/M drop reported yesterday.  However, that wouldn't meaningfully change the analysis; see below).

     However, let's broaden out the consumer behavior analysis to one that focuses on personal consumption expenditures, or PCEs.

The chart above shows the quarterly percentage change in real PCEs and its three sub-components: durable goods, non-durable goods and services.  The most impressive feature above is the green column which represents durable goods purchases.  These have consistently increased at a minimum of 4% Y/O/Y since the end of the recession.  Because durable goods purchases usually require some kind of financing, we can use these sales as a de facto reading of consumer sentiment.  Non-durable goods have been the consistent under-performer; in some quarters they barely increased and for the last 11 quarters they have been the clear statistical laggard.  Services (purple) have been a bit stronger, printing at between 1.5% and 2% for the last six quarters.  But, the sum total of the above chart is that consumers are still spending.

     This is not to say the US consumer is in the best shape.  The biggest problem is the slow pace of wage growth, which has been increasing at a mere 2% for some time.  And the high level of the broader unemployment metric (U6) indicates this might continue for some time.  However, despite these headwinds, the above chart shows the US consumer is still spending at a moderate rate.

     Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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