Trust Consumer Spending Data Over the Services Report
Consumer Spending data disappointed investors Tuesday, leading the Dow down fractionally, but stocks are up some today. The Greek tells you why investors would be better served following their first impression on consumer spending, and ignoring today's Non-Manufacturing Index from the Institute for Supply Management.
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You heard this here before. The American economy has a consumption driven engine, and within that consumption, it is the consumption of services that drives most of the motor power. Well, the latest reading on personal spending, released Tuesday morning, showed American restraint, if not constraint, in spending in June. Without consumer spending folks, we are lost! However, this mornings ISM Non-Manufacturing data showed a gain in the services measure. So what's up then?
Personal Income & Outlays
Investors keyed on Personal Spending Tuesday, and so shares slipped on the day when the outlays data showed an increase of just 0.1% on the price adjusted measurement. The slight gain met economists' views for the same in June. Bad news resulted in the revision of May's spending activity though, with the month's measure revised down to +0.1%, from the initially reported gain of 0.2%. Considering April showed no change in activity, future spending is in question. We showed Friday, in our analysis of the Advance GDP Report for Q2, that the spending driver might be dissipating on persistent unemployment and fading government stimulus.
The spending measure is composed of durable and nondurable goods purchases and also the purchases of services. Durable goods met decent demand, increasing 0.4%, but the measure is volatile due to the high-ticket of items included (aircraft etc.). Still, the increase compared against a May decrease of 0.1%. Spending on nondurables increased just 0.1% in June, but that compared against a May decline of 0.2%. Purchases of services was the source of concern for the market, because this very important segment saw an increase of just 0.1%, versus May's gain of 0.3%. This comparison fits with the relative drop-off we have noted in other economic metrics.
PCE Price Index
The Fed's favored gauge of inflation is found in this report. The Core PCE Price Index is therefore closely followed. Core PCE was about unchanged (less than 0.1%) in June, versus May's 0.1% rise, stirring up concern for deflation. Some economists have been warning that the US may be precariously close to following the path of Japan's lost decade. That said, there is little standing in the way of Fed driven stimulus to economic activity now, and FOMC board members are openly talking about just that. Just a few months ago, the Fed's discussion was completely centered around exit strategy. Only Wall Street Greek was warning about premature departure. Economists were looking for a 0.1% increase in the Core PCE for June, but those guys are paid by investment houses to keep cash interests, where we are your street-level independent resource both reporting and analyzing for you, and in expert fashion (and for free!). God bless the Internet.
Personal income was about unchanged in June, versus the consensus forecast increase of 0.1% and against May's revised 0.3% increase. Income was impacted by fluctuations in the number of temporary census workers through the periods measured.
ISM's Non-Manufacturing Index
Reported as a positive surprise, ISM's Non-Manufacturing Index improved to 54.3% in July, from 53.8% in June. The result came against economists' consensus expectations for a reading of 53.0. Services are very likely seasonally impacted by hiring along America's beaches, mountains and resorts, and though this may be seasonally adjusted, we doubt it's capturing the change coming off significantly low and abnormal levels of activity. You're not hearing this anywhere else, and it takes out-of-the-box thinking to come up with this type of analysis. You cannot get out of the box thought from within the box shops.
Taking this into account, we are not at all excited by the very slight gain in services activity. Looking at the details, Business Activity posted a lower measure of 57.4, versus 58.1 in June. New Orders improved to 56.7, from 54.4, while Employment edged into positive territory, rising to 50.9, from 49.7 in June. Seasonal hiring characterizes the types of businesses we expect are driving much of these gains.
Take note of where the gains and losses were recorded. The 13 industries reporting growth in July based on the NMI composite index — listed in order — are: Real Estate (come on! this is highly suspect), Rental & Leasing; Arts, Entertainment & Recreation; Management of Companies & Support Services; Agriculture, Forestry, Fishing & Hunting; Retail Trade (sure!); Information; Other Services; Transportation & Warehousing; Public Administration; Mining; Health Care & Social Assistance; Educational Services; and Wholesale Trade. The four industries reporting contraction in July are: Construction; Utilities; Accommodation & Food Services; and Finance & Insurance.
While Retail Trade is reported as an expanding sector, the report offers a warning from one survey respondent, "Concerning forecasts and the instability in markets are continuing our focus on cautiousness." We also suggest that the fact that this is a survey, where the results are known to be published, leads many respondents to favor an optimistic answer. In order to achieve successful results, one must look successful, and so we suggest respondents are careful of making negative statements and offering answers along those lines. Plus respondents are afraid to lose their jobs by answering truthfully. I have to handicap the ISM data because of this bias.
The corporate news wire offered the introduction of Research in Motion's (NYSE: RIMM) new smartphone. Rumor has it that RIM also has a product in development to compete against Apple's (Nasdaq: AAPL) iPad. Abbott (NYSE: ABT) presented at the Wedbush Morgan Securities Life Sciences Best Ideas Conference. Corning (NYSE: GLW) and National Instruments (Nasdaq: NATI) met with investos. The earnings schedule highlighted news from Anadarko Petroleum (NYSE: APC), Chesapeake Energy (NYSE: CHK), Baker Hughes (NYSE: BHI), Pfizer (NYSE: PFE), Procter & Gamble (NYSE: PG), Duke Energy (NYSE: DUK), Emerson Electric (NYSE: EMR), The Dow Chemical Co. (NYSE: DOW), Marsh McLennan (NYSE: MMC) and Mastercard (NYSE: MA).
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