Merk Investments: Personal Expenditures

The fiscal stimulus inspired an above expectation posting in both personal income and spending. Income increased 1.9% m/m and 6.4% y/y and was fueled by a 5.7% advance in personal disposable income on a monthly basis. Personal spending on a nominal basis increased 0.8% m/m and 5.4% y/y. On a smoothed three month annual basis nominal spending increased 5.2% m/m and the savings rate rose 5.0% in May. The primary target of consumer spending was in the non-durable category, which increased 1.184% on a nominal basis and 0.385 on a real basis. Adjusted for inflation, spending on durables rose increased 0.115% and services advanced 0.396%. On an inflation adjusted basis consumption increased 0.4%, which was the single largest advance since December 2006.

The personal consumption expenditure deflator increased 0.4% m/m and 3.1% on an annual basis. The core saw an increase of 0.1% and advanced 2.1% y/y, also below expectations.  According to the Bureau of Economic Analysis the cost of durables fell -0.291% m/m and -1.369% y/y. However, the price of non-durables rose 0.817% m/m and 4.539% y/y and the cost of services increased 0.322% m/m and 3.272% y/y. Ex-food and energy prices increased 0.113% m/m and 2.139% y/y.

Without a doubt, it is not an understatement to state that the well-timed rebates saved the second quarter of 2008. Based on our mid-quarter estimate personal consumption should arrive at 1.0% for Q2’08 with considerable room to the upside based on impact from stimulus inspired consumption in June and July. This should partially offset the very difficult environment in manufacturing and investment. However, the positive data that the market is observing in May, and that which we expect to see in the first two months of Q3’08 will generate a massive payback in the final quarter of the year. This data should provide at least some stimulus for an small relief rally in equities, but the continuing increase in the cost of oil will weigh quite heavily on the market and does cast some amount of doubt on the very sunny inflation data attached to this mornings income and spending report.

Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy

This report was prepared by Merk Investments LLC, and reflects the current opinion of the author.  It is based upon sources and data believed to be accurate and reliable.  Opinions and forward looking statements expressed are subject to change without notice.  This information does not constitute a solicitation or an offer to buy or sell any investment product, nor provide investment advice. Merk Investments does not own any of the stocks mentioned; this is not an offer to buy or sell any security mentioned.