Several economic reports released this morning provide a capsule overview of the economy. The Commerce Department reported that consumer spending increased a meager 0.1% in June as high gasoline prices, falling home values, and a weak dollar took their toll. Spending on big-ticket items in general and automobiles in particular fell sharply. Inflation, however, remained tame. The Personal Consumption Expenditure (PCE) Index, excluding food and energy, inched up rose 0.1% for the fourth consecutive month. The PCE, which the Fed considers the most accurate inflation gauge has risen just 1.9% over the last 12 months. This is the smallest year-over-year increase since March 2004; more importantly, it is finally within the Fed’s inflation comfort zone of 1-2%.
A gloomy report on home prices in 20 metropolitan areas indicated that housing problems are not near abating. Only five cities enjoyed year-over-year price increases. The Detroit area is suffering the most. Home prices there have declined 11% since May 2006, and the pace of decline is accelerating rapidly. The annualized depreciation rate for the last three months exceeds 20%.
An index of businesses conditions in the Chicago-Detroit area was also disappointing as new orders, production and order backlogs fell from previous months’ levels. The key here is that if domestic consumer spending falls off, economic expansion, if it is to continue, will have to driven by business investment.
Today’s final report was consumer confidence, which surprisingly reached its highest level in six years. Less than 15% of those surveyed think economic conditions are “bad,” and less than 20% think jobs are “hard to get.” More than 30% think jobs are “plentiful,” and barely 8% believes business conditions are about to get worse. The persistently low unemployment rate, stable—though high—gas prices, and June’s dramatic stock market gains are believed to be the drivers.
On Friday, the Labor Department will provide the June employment numbers. With that data in hand, we will be in a better position to consider what will happen—or not happen—when the Federal Open Market Committee meets next week.