Consumers flashing cash and confidence

Americans are earning more money, but they weren’t doing a lot of mid-winter spending, and one reason may have been that income tax refund checks from Uncle Sam were slow to arrive.
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Americans are earning more money, but they weren’t doing a lot of mid-winter spending, and one reason may have been that income tax refund checks from Uncle Sam were slow to arrive.

Many analysts were blaming delays in tax refunds for the meager 0.1 percent increase in consumer spending in February — the smallest since August — that the Commerce Department reported Friday, but they saw the slowdown as a temporary phenomenon.

"Given the weather-related weakness in utilities spending, as well as some delays in tax refunds for low- and middle-income earners in February, we expect consumer spending to strengthen in the quarters ahead," Eugenio Aleman, a senior economist at Wells Fargo Securities in Charlotte, told Reuters.

The better piece of Friday’s news from the Commerce Department was that personal income rose a strong 0.4 percent in February after an 0.5 percent gain in January. With consumer confidence also rising, the business outlook remains good as spring weather begins to take hold across the country.

“It’s hard to be concerned about consumers when jobs and confidence are doing what they’re doing and balance sheets are in such improved shape,” Ted Wieseman, an economist at Morgan Stanley, told MarketWatch.

The Conference Board said last week that its Consumer Confidence Index rocketed to a 16-year high of 125.6 in March.

“Consumers’ assessment of current business and labor market conditions improved considerably,” The Conference Board director of economic indicators Lynn Franco said in a statement.

“Consumers also expressed much greater optimism regarding the short-term outlook for business, jobs and personal income prospects. Thus, consumers feel current economic conditions have improved over the recent period, and their renewed optimism suggests the possibility of some upside to the prospects for economic growth in the coming months.”

Multiple aspects of the monthly survey trended in a positive direction. The Conference Board said consumers’ appraisal of current conditions improved considerably in March. The percentage of respondents who said business conditions are “good” increased from 28.2 percent to 32.2 percent; those who said business conditions are “bad” decreased from 13.4 percent to 12.9 percent.

MarketWatch said the gains cut across most regional and income groups — the higher a household’s income was, the higher its consumer confidence reading.

The University of Michigan’s Consumer Sentiment Index was not as high at the end of March as it was two weeks ago, but its 96.9 reading topped February. Once again in March, the survey picked up significant static that reflects the country’s political divide.

“The continued strength in consumer sentiment has been due to optimistic views on three critical components: higher incomes and wealth, more favorable job prospects and low inflation expectations,” Richard Curtin, chief economist of the university’s Surveys of Consumers, said in a statement. “All of these factors, however, have been influenced by partisanship. Democrats expect an imminent recession, higher unemployment, lower income gains and more rapid inflation, while Republicans anticipate a new era of robust growth in incomes, job prospects and lower inflation.”

Revealing rising uncertainty as well as rising optimism, the data “indicate that real consumer spending will advance by 2.7 percent in 2017, but those gains will be uneven over time and across products,” Curtin said.

Motor vehicle sales, a bellwether, were below forecasts in March, reports that were released on Monday showed. Sales rose 1.6 percent at General Motors, but Ford and Fiat Chrysler reported declines.

March "was a tough, tough, tough market," Judy Wheeler, vice president of U.S. sales at Nissan Motor Co. Ltd., which reported a 3.2 percent increase in sales for the month, told Reuters. "It's going to be an aggressive year, and I think everybody realizes that."

The Detroit News said analyst reaction was that rising industry sales may have peaked.

“We’ve been saying for some time that U.S. sales have plateaued at a very high level,” Michelle Krebs, an executive analyst for Autotrader, told the newspaper. “March seems to prove that out. Sales are coming in strong, but softening as we anticipated. But, again, it’s still at a very high level.”

It has been a while since inflation has affected the economy, but an important measure crossed a threshold last week that could prompt the Federal Reserve to quicken the pace of interest-rate increases.

The Commerce Department said Friday that the Personal Consumption Expenditures Price Index — the inflation gauge that the central bank prefers to watch — rose a seasonally adjusted 0.1 percent in February, compared with the previous month, and was up 2.1 percent from a year earlier.

The annual increase in the index was the strongest since March 2012 — five years ago — but Morningstar reported that the Fed does not expect inflation to rise much from the February reading.

"We expect core inflation to move up and overall inflation to stabilize around 2 percent over the next couple of years, in line with our longer-run objective," Fed chairman Janet Yellen said at a press conference in mid-March after the central bank’s policy-making committee raised its benchmark interest rate.

Inflation nearing the Fed's target, along with a historically low unemployment rate, makes it "appropriate to gradually raise the federal funds rate," she said, according to Morningstar.

The Labor Department will release its monthly jobs report for March on Friday. The data are expected to show that that the economy added 180,000 jobs in March and that the unemployment rate remains at 4.7 percent.

However, CNBC said economists are paying more attention to events in Washington this week, where Congress will try to make progress toward a continuing resolution to fund the government and President Trump will meet with Chinese President Xi Jinping.

"Employment is always a focus, but my guess is it's going to be soft, relative to trend, because of the weather, and nobody's going to care because it's a weather story if it's weak," Joseph LaVorgna, chief U.S. economist at Deutsche Bank, told CNBC.

What Congress says about the continuing resolution is “more important to me,” LaVorgna said. Congress will need to agree on a spending package in order to avoid a government shutdown on April 28.

They'll have about four days to extend it when they return from their [spring break]," he said.

Paul Christophe, chief international investment strategist at Wells Fargo, told CNBC that the meeting Thursday and Friday between Trump and Xi at Trump’s Mar-a-Lago resort in Florida will deliver key information about the coming trade relationship between the two countries.

"It's going to be an important signal that [Trump] comes out of these negotiations or talks [looking like] he's open-minded,” Christophe said. “If he's getting ready for a 30 or 40 percent tariffs on Chinese goods, then look out. Then he's already made up his mind.”

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