Economists React: ‘Little More Growth, Little Less Inflation’

June 27th, 2008 | Wall Street Journal

Economists and others weigh in on the jump in consumer spending and personal income.

A more comforting set of economic data with tax rebates boosting real household spending a little more than expected in May while the core PCE deflator — the Federal Reserve’s preferred underlying measure of inflation — recording a benign 0.1% m/m gain, allowing it to unexpectedly drift back closer to the Fed’s comfort zone. For once, a little more growth, a little less inflation! –Richard Iley, BNP Paribas

We have an indication that consumers are using the extra funds to purchase non-durable items such as gasoline and food, thus cushioning the blow from recent price increases, but durable goods purchases such as vehicles and home furnishings, are still weak. If this pattern continues, then the multiplier effects of the fiscal stimulus plan will be limited and the numerous drags to consumer spending, including weak labor markets, declining home prices and high energy prices, will remain in place well after the fast temporary relief from the tax rebate checks recedes. –Stuart Hoffman, PNC

Without a doubt, it is not an understatement to state that the well-timed rebates saved the second quarter of 2008. Based on our mid-quarter estimate personal consumption should arrive at 1.0% for the second quarter with considerable room to the upside based on impact from stimulus inspired consumption in June and July. This should partially offset the very difficult environment in manufacturing and investment. However, the positive data that the market is observing in May, and that which we expect to see in the first two months of the third quarter will generate a massive payback in the final quarter of the year. –Joseph Brusuelas, Merk Investments

Consumption came in much higher than anticipated in May. The upside surprise was in services — some of this strength seems a little strange. For example, price-adjusted spending on electric and gas utilities soared 3.5%, even though the Feds IP data showed a decline in electricity generation due to relatively mild average temperatures across the country. –David Greenlaw, Morgan Stanley

The level of real consumer spending in May was 0.66% (not annualized) above the average for the first quarter as a whole. This indicates a much better growth rate for consumer spending in the second quarter GDP accounts than the anemic 1.1% pace posted in the first quarter. Moreover, with government rebate payments flowing, we will probably see the temporary lift to consumer spending continue in June, with possibly some spillover into July as well. However, we would emphasize the temporary and relatively modest nature of this boost. –Joshua Shapiro, MFR Inc.

May personal incomes rose 1.9%, far above the consensus 0.4% because the BEA treats tax rebates as income for people who don’t pay taxes or whose taxes were smaller than the rebates. Ex-rebates incomes rose 0.4%, as expected. –Ian Shepherdson, High Frequency Economics

Compiled by Phil Izzo

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