Thursday, June 26, 2014
Another day, another weak read from the economy. But stock market investors are an optimistic bunch; they wouldn’t let anything hold them down. They like good news, but they have taught themselves to like bad news as well.
This morning’s May personal spending read came in weaker than expected – up +0.2% vs. expectations of +0.4% gain. The other part of today’s report – personal income – came in-line with expectations, up +0.4%. Income growth has been held down by a labor market that is recovering way too slowly, which is holding back wage-growth in check. Other longer-acting secular forces are also coming in the way of income growth, but the weak labor market is the biggest force here. The weekly initial Jobless Claims numbers from this morning, largely in-line with expectations, shows that the labor market is steadily improving. But it’s a slow grinding recovery.
Low income growth has a direct bearing on spending trends. And spending is a big deal, as it accounts for more than two-thirds of the U.S. economy. We saw in the revision to the Q1 GDP report on Wednesday where spending growth was significantly lowered from what was initially expected. The stock market’s disregard of the GDP report likely reflected the hope that that a lower growth trajectory for the U.S. economy will keep the Fed in the easy rates lane longer than would otherwise be the case.
Janet Yellen was very explicit in her assurances on this count following the recent FOMC meeting. The starting point of the interest rate ‘normalization’ process, she told the markets, was a function of how the economy performed relative to the FOMC projections. They lowered their GDP growth estimates for this year at the June meeting, but even that lowered growth pace will be hard to achieve given how deep the Q1 hole actually turned out to be.
What all of this boils down to is that economic growth will be lower relative to what the markets were expecting earlier. In the twisted logic of stock market investors this isn’t something to worry about as it will keep the Fed on hold even longer. The bond market was all along reflecting this view, why else would treasury bond yields be this low despite the earlier rosy projections for the economy.
Director of Research