Consumers Continue to Disappoint

Personal disposable incomes rebounded 0.5% after adjusting for inflation in January, after being revised down in December. Gains in the service sector offset another decline in manufacturing wages. The concern is that layoffs due to COVID-19 in the travel and tourism sector could dampen wage gains later this quarter. Farm subsidies continued to contract but could return as China will likely fail to meet its obligations associated with the Phase One trade deal. We also saw a pickup in the tax credit for the Affordable Care Act, which added to incomes during the month.

Consumer spending was considerably weaker, posting an almost negligible gain of 0.1% in January, the same as December after downward revisions. A sharp drop in spending on nondurable goods - largely clothing - in the wake of an unusually mild January accounted for the bulk of the weakness. Retailers don’t sell much winter gear when the temperatures in Chicago reach the 50s in January. Spending on services held up much better. Going forward, spending on all but necessities is at risk as conferences and travel plans are canceled in response to the spread of COVID-19. The worst of the losses are not expected to show up until we see the data for March, which will be released in April.

The saving rate edged up to a 7.9% pace from 7.5% in December. Older home owners have been saving more and consolidating debt instead of spending the cash they save when refinancing their mortgages. That is a unique characteristic of today’s economy, yet another reason to expect a pull-back in the wake of the recent stock market rout. Boomers who are closer to retirement have proven to be more skittish in their spending patterns when the stock market corrects.

Separately, the personal consumption expenditures (PCE) index edged up 0.1% in January after posting a 0.3% gain in December. The PCE moved up to a 1.7% pace from a year ago in January. Higher energy prices, which have since plummeted, contributed to those gains. The core PCE edged up 0.1% in January, after rising 0.2% in December. Year-over-year gains were up 1.6%, which is still well below the Federal Reserve’s 2% inflation target. The Fed will cut rates with concerns that the U.S. and global economy could slip into recession in response to the COVID-19 outbreak.

Bottom Line
All data now must be viewed through a dividing line: pre- and post-COVID-19 outbreak. This data is pre-COVID-19 and still provides some rationale for the Fed to cut. It will cut soon - at the March meeting if not sooner. A coordinated rate cut inter-meeting cannot be ruled out. What is notable is how little leeway there is for rate cuts given the negative rates in much of the developed world.

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