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Macro View

A mix of inline domestic and weak international data provides the backdrop for Chairman Bernanke's Jackson Hole speech on Friday. On the home front, the Personal Income & Spending data for July was roughly in-line with expectations, while the weekly initial Jobless Claims data was a tad weaker than expected.

Beyond our shores, weak data out of Japan, Europe and South Korea this morning again reminded us of the worldwide economic challenges.

Today's July Personal Income & Outlays report shows that the U.S. economy started the current quarter on firmer footing than was the case in the second quarter. Consumer spending increased at a better-than-expected 0.4% pace in July following the flat reading in June and a drop in May. This is in-line with what we had seen in the positive July Retail Sales data and provides some confirmation of positive momentum on this key front.

Personal Income growth also came in-line with expectations, up 0.3% in July after the 0.3% gain in June (revised down from up 0.5% originally reported). On a related note, we got August same-store sales data this morning, with a number of retailers including Target (TGT - Analyst Report), Gap (GPS - Analyst Report), Macy's (M - Analyst Report) and Nordstrom (JWN - Analyst Report) posting better-than-expected numbers.

Consumer spending, the biggest driver of the economy, increased at a 1.7% pace in the second quarter, revised higher in Wednesday's second reading from the 1.5% originally reported but below the first quarter's 2.4% pace. For the economy's growth momentum to improve in the current quarter and back half of the year, consumer spending needs to rise from the second quarter's pace. But that will be possible only once the labor market starts showing sustainable signs of improvement.

This morning's somewhat disappointing Jobless Claims data indicates that the modestly improving trend of recent weeks remains in place. We will get a better picture of the labor market from the August non-farm payroll numbers coming out next Friday. But a number along the lines of what we got in July would generally be looked at favorably.

It is far from clear what all of this means for Fed policy, and the market's tentativeness of recent days shows exactly that. Many serious market watchers remain of the opinion that the economy's condition is not precarious enough to warrant fresh Fed support. They point to Wednesday's 1.7% GDP growth rate in the second quarter and expectations of 100K-plus jobs in next Friday's Jobs report as evidence in support of this claim.

This morning's July Personal income & Outlays reading would also fall in that category. I am of the view that more Fed action is largely irrelevant to the issues facing the U.S. economy. Neither lack of liquidity nor higher interest rates are hurdles for the economy at present; in fact both of those variables remain quite supportive already.

Fiscal issues on the home front and a slowing international economy are the issues holding the economy back and more Fed action will do little to help out on those fronts.


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