2/2/2015
By Jennifer Coombs

We’ve seen quite a large amount of volatility in the consumer sector over the past few months. Inflation remains weak; however income growth has been quite steady. For the month of December, personal income increased by 0.3% after also increasing by 0.3% in November, and was in-line with economist expectations. The wages and salaries component moved higher at a modest 0.1%; however this was relatively weak compared to the 0.6% pop from November. Personal spending declined by 0.3% in December, after a boost of 0.5% in November, and should have been an indication of better-than-expected holiday sales. The reading was slightly worse than economist expectations for a 0.2% drop in December spending. Also worth noting is the rate of savings as a percentage of income, which popped to 4.9% in December after a revised 4.3% (from 4.4%) rate in November. Clearly, lower fuel prices are actually causing consumers to save money rather than spend it. Durables declined by 1.2% for the month due to a drop in auto sales, following an increase of 1.8% in November. The nondurables reading, which includes gasoline spending, decreased by 1.3% after dropping 0.3% the prior month. Services, on the other hand, edged up 0.1%, following a 0.5% spike in November. Personal Consumption Expenditure (PCE) inflation was still weak in December, largely due to lower energy costs. Headline inflation decreased 0.2% on a monthly basis, following a drop of 0.2% in November, but slightly higher than consensus’ expectation for a 0.3% drop. Core PCE inflation was flat in both December and November, and was also what the Street expected. Overall this report shows that the consumer sector is still healthy, but it’s not strong enough to get the Fed to raise interest rates in the near-term.

According to the Institute for Supply Management (ISM), growth in the manufacturing sector had been showing some positive signs of growth relative to other reports on the manufacturing sector, but we note that growth has slowed down in the last two readings. For January, the composite score for the manufacturing purchasing managers’ index (PMI) came in at 53.3, compared to a revised 55.1 in December and 57.6 in November. October’s reading was the peak of the fourth quarter at 57.9. The culprits behind the decline were in new orders, which slowed significantly to 52.9 from 57.8 in December. In contrast, order growth in November and October showed readings in the low 60s which was exceptionally strong. Weakness could also be traced to foreign demand, which showed that export orders declined below the break-even level of 50, to a reading of 49.5. This is the lowest reading for export orders since November 2012. Additionally, total backlog orders declined into contractionary territory to a reading of 46.0. Production was actually strong due to the working down of backlog activity, and priced paid continued its descent thanks to the price of oil, to a reading of 35.0 – this is the lowest reading since April 2009. All in all, this report is a concerning start to the year, reflecting weak foreign market activity and oil troubles on a global scale. This reading heavily underscores the accuracy of the weak manufacturing activity reports from the various Fed districts.

Construction activity in the month of December managed to rebound, although it came in lower than analyst expectations. Construction outlays increased by 0.4% in December after a 0.2% decline in November, but came up short of consensus at 0.6%. The increase was ultimately led by higher spending on public construction projects, which rebounded by 1.1% in the month after dropping by 1.8% in November. Private residential construction showed some improvement, increasing by 0.3% in the month after increasing by 0.1% in the prior month. Additionally, private non-residential construction spending eased by 0.2% following a 0.8% increase in November. If we look at construction spending on a year-over-year basis, total outlays increased by 2.2% in December 2014 which was a slight slowdown from the 2.7% year-over-year increase in November 2014. The recovery in private residential construction is encouraging as it further supports the housing recovery story in 2015.

Jennifer Coombs
Wall Street Strategies

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