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Spending, Income and Inflation

June 27, 2011 – 4:56 pm

Consumer Spending in May was flat as reported by the government. It was the weakest month in a year but the numbers were expected. It was down .1%, adjusted for inflation while personal income rose .3% which was also expected. Both spending and income were revised downward in April as well.

The PCE (Personal Consumption Expenditure) index rose .2%. This is a gauge of inflation that the Federal Reserve likes much better than the CPI and PPI. Thus inflation is still well contained especially if you consider the recent fall in gasoline prices which makes up a big part of the average consumer’s spending.

Economists who study these numbers are blaming the drop in spending on auto sales as the main culprit as the earthquake and tidal wave show their impact. With the Japanese auto industry returning to normal over the next month or so the question moves to the rebound and its strength.

One bit of good news in this report is that the savings rate increased back up to 5% from 4.9%. I guess if you can’t find the car you want you wait, thus your savings rate increases. Will that reverse next month when the new models hit the showrooms?

The slowdown certainly looks like a temporary situation. The rebound will be good for our economy and the stock market in the months ahead.

Good Trading
Steve Peasley

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