Good Tidings for 2006
U.S. data released in late March and early April largely confirm that the economy will post a solid first quarter. Gross domestic product should be spurred by a big first-quarter growth clip for real consumption that we at Action Economics peg at 5% to 5.5%. Solid nominal (i.e., unadjusted for inflation) sales -- led by soaring net worth, rising confidence, a falling savings rate, and high energy prices -- will drive increases in investment, income, and employment.
With release of the auto sales figures for March, and the consumption figures through February in the recent personal-income report, it's now clear that our 5% to 5.5% first-quarter estimate for real consumption (adjusted for inflation) is on the mark. And with a solid close to the quarter, likely including a 0.5% gain for retail sales and a 0.6% increase for personal-consumption expenditures, our 4% growth forecast for real consumption in the second quarter appears well positioned as well. These solid back-to-back quarterly gains will mark a particularly strong combo for this expansion.
Free-spending consumers appear to have little use for their piggy banks. The persistent strength in consumer spending has been associated with a steady downtrend in the personal-savings rate. Though economists keep looking for the savings rate to bounce, there's little evidence of any reversal of fortune over the coming months. Indeed, the robust round of consumer-confidence data for March from the Conference Board's monthly index suggests that consumers are becoming increasingly optimistic about the economy, as gauged by the current conditions index, though the expectations index is showing the usual mid-cycle sluggishness.
Strength was also evident, though to a lesser degree, in the final University of Michigan sentiment figures for the month, alongside an uptrend in the weekly ABC-Washington Post figures that also bodes well for the April monthly data.
Strength in spending through the first quarter likely received a boost from continued wealth gains. Surging stock prices will more than cover for any restraining effect of lean home price gains in the first quarter, as gauged by the Fed's U.S. household net worth data. Household-wealth gains will continue to drive spending, just as some market economists will focus on the effect of rising mortgage payments on household-cash flow.
Ultimately, strength in spending largely reflects the surge seen in employment and income growth as we entered the first quarter, via the post-hurricane rebuilding effect and associated unwinding of disruption effects in the first quarter. Fixed investment received a sizable boost from the hefty upward revisions in the March construction spending report.
Finally, nominal spending in March will get a lift from the bounce in gasoline prices on the month, which had remarkably little negative effect on confidence. Rising gasoline prices restrain "real" growth, but boost the nominal spending figures -- especially when the gains don't seem to contribute to fears of a disrupted economy. The March runup in gasoline prices seemed particularly stealthy, in that it received little press coverage or consumer reaction in surveys, as opposed to what was seen in the fourth quarter.
Amid all the positives, there are some factors restraining the consumer. Taxes, for one thing. Treasury receipts are soaring as we approach the April tax date, and this drain on disposable income is likely to be having a greater negative effect on spending than the associated positive effect that a growing economy is having on tax-refund payments.
Refunds have tracked last year's strong figures pretty closely, but the seasonal factors may finally be catching up with the robust growth and "pull-aheads" to February in refund payments in recent years, especially given the lack of growth this year.
The strength in Treasury receipts through this cycle, and especially since the acceleration in real growth in 2004, is leading to a steady uptrend in the ratio to personal income of "tax and non-tax payments," which defines the difference between personal and disposable income. This ratio took a big jump at the start of 2005, and is trending upward to a likely new peak in April, as tax receipts at the Treasury surge through the April 15 tax date. This strength in tax receipts is good news for the budget deficit, which should fall well below last year's $314 billion gap, but bad news for households.
Another negative for consumers reflects the business stumbles at General Motors (GM) and Ford (F), as these major U.S. auto makers are no longer passing on the "free lunch" of unsustainably low vehicle prices. Despite a recent small correction in year-over-year vehicle price gains, the auto makers have managed to "hold the line" on price for two years now -- at the expense of volume. The March vehicle sales figures largely extend the impact of this industry shift, as Ford, and particularly GM, continue to pay a harsh price in lost sales to competitors, who otherwise had a strong sales month in March.
If we look at the breakdown of retail sales growth, we see that demand for building materials, along with gasoline, have played a big role in consumer-spending strength over the past year. Big gains here could be seen in the negative context of reflecting rebuilding of previous assets.
But from the standpoint of consumer spending, they imply a positive effect on growth. Indeed, construction spending often prompts followup spending on equipment and furniture. Overall, the available data for the first quarter have locked in a big quarter for the consumer.