Tim Duy interprets the latest data:
Chewing on the Data, by Tim Duy: So this is what is has come to:
A price index for personal consumption expenditures excluding food and energy rose 0.2% in April, meeting expectations. However, the unrounded number was 0.24968%, failing to calm inflation concerns.
This gem is from the Wall Street Journal’s first take at the April’s Personal Income and Outlays report. We are all going to go crazy if data dependence really means that we need to start rounding to the fifth decimal place. Considering the likelihood of revisions and measurement error, talking about inflation to the third decimal place is not particularly constructive; the fifth decimal place is downright silly.
I will put this as simply as I can – never, not once, in any discussion I ever had with a Federal Reserve official, did an official round beyond the second decimal place. Actually, I am not even confident I heard anyone round beyond the first decimal place. Let’s try to keep some perspective. This is monetary policy. We are not swinging satellites around the sun here.
A brief review of the week’s key data is in order before we all retire to enjoy a long weekend in the States. Working backwards, this morning’s PCE report revealed the twin concerns of a slowdown in consumer spending and an uptick in core inflation. My sense is that the FOMC will be comfortable downplaying the 0.3% rise in core in light of what is shaping up to be a significant easing of spending since the beginning of the year. The Fed will view recent inflation as an artifact of past economic strength and the pass through of higher energy prices. They cannot change the past, and instead must focus on the future.
The future means keeping a close eye on demand pressures. And on that front, recent data show households struggling to maintain spending in the face of higher energy costs. Spending growth has slowed to a crawl this YEAR. The 5.2% gain in 1Q06 is an artifact of weak 4Q05 growth and, more importantly, driven by significant spending jumps late last year. For the record:
Real PCE Growth, % Change M-o-M
Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 –0.5 0 0.9 0.7 0.3 0.2 0.1 0.1
If energy prices stabilize, however, won’t real growth kick up in response? After all, wage and job gains are solid (although nothing to get excited about). Yes, if price gains aren’t eating up spending gains, real spending growth will get a boost. But the Fed expects the slowing housing market to come to bear on consumer spending later this year. There, too, things look to be evolving as expected. The rise in new home sales, being in part an artifact of the downward revision of the March bounce, will not dissuade Fed officials from that view. This is especially the case after seeing existing home sales figures – which revealed that inventories had climbed to a 6 month supply at the current sales pace. Fed officials have repeatedly pointed to the strength of the housing markets as a support for consumer spending; I find it hard to believe that they will ignore the slowdown now that it has begun.
Likewise, the durable goods report is supportive of the Fed’s view of the economy. Remember, Fed officials have consistently said they expect investment spending to remain strong even as the economy slowed as consumer spending pulled back. And while the headline and core new order numbers slipped in April, this reflected some give back for the March bounce (see also David Altig). Looking at the path of new order for nondefence, nonaircraft capital goods, I think it is tough to see anything expect a solid underlying trend:
Click on figure to enlarge
I don’t think it is realistic to expect the Fed to wait until this number has rolled over before they take a breather from the rate hikes – that would be overshooting plain and simple.
In short, the economy looks to be evolving very much as the Fed expected. Moreover, considering lags, the impact of past tightening has yet to be fully felt further supporting the case for a June pause. And while I feel my resolve on that call strengthening again, hawkish sounding rhetoric from some Fed officials reminds us that nothing is a sure thing at this point, and a month of data is yet to come. Continue to remember that a pause does not mean done; with the economy set to bounce around capacity, Fed Chairman Ben Bernanke will keep one foot hovering over the brake.