February Supply Managers’ Manufacturing Index and January Income and Spending
Economics in a nutshell: “A decline in energy costs is allowing households to spend more and that should keep growth going solidly.”
INDICATOR: February Supply Managers' Manufacturing Index and January Income and Spending
KEY DATA: ISM (Manufacturing): -0.6 point; Hiring: -2.7 points/ Inflation-Adjusted Disposable Income: +0.9%; Inflation-Adjusted Consumption: +0.3%
IN A NUTSHELL: "A decline in energy costs is allowing households to spend more and that should keep growth going solidly."
WHAT IT MEANS: Down can be good, especially when it relates to energy costs. The huge decline in prices is helping keep both spending and savings up. Consumption, when you just look at the dollars spent, fell in January. But as I always say, the information is in the details and not the headlines, and when you take into account inflation, demand was up solidly. Some of the money left over went into savings, which rose as well. The spending increase was across the board and included another sharp rise in services demand. This lagging component is finally taking its place as a leader in the economy. Given it is 65% of consumption and 45% of the economy, that is really important. But the key part of the report was the income numbers. Adjusting for inflation, disposable income, which is what is left after the government takes its share, soared. Wage and salary gains are strengthening and with large retailers raising their wages, this can only get better. Thus, the outlook for consumption is quite positive.
On the manufacturing front, firms continue to expand, though not as rapidly as they had been. The Institute for Supply Management's February manufacturing survey found that orders, production and hiring eased a touch. But backlogs rose again. Filling order books usually mean greater future output and hiring. The bad winter and the West Coast port shutdown may be skewing data this quarter. If you cannot get or move goods, there tends to be problems. Given those issues, the moderation in manufacturing activity is really particularly large.
MARKETS AND FED POLICY IMPLICATIONS: We have finally managed to make it to March and hopefully that will mean fewer polar vortexes. And now that goods are actually being offloaded at the coast ports, supplies and production should pick up. But the future of manufacturing is really in the hands of the consumer and here things look a lot better than they have in a long time. Solidly growing worker compensation has been the missing link in this recovery and that is finally starting to appear. We are seeing large companies announce wage hikes and that can only spread across industries. That bodes really well for future spending and as the consumer goes, so goes just about every other component of the economy. However, we need even better wage and salary increases before we can declare victory and say the economy is off to the races. That will require time, as those firms that are resisting raising wages will have to see their turnover rate accelerate before they accept reality. But by then, they will be playing catch up and the costs of retention and attraction in the future could be a lot more than early action now. How the Fed members read the improving wage situation is unclear. There is still a battle over whether it is better to move sooner or later. Rising wages support the sooner argument, but this report does not yet prove the case.
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