INDICATOR:  February Spending, Income and Pending Home Sales

KEY DATA:  Consumption: +0.1%; Disposable Income: +0.4%; Prices: +0.2%; Excluding Food and Energy: +0.1%/ Pending Home Sales: +3.1%

IN A NUTSHELL:  "Income is rising solidly but a lot is going into savings."

WHAT IT MEANS:  If they earn it will they spend it?  Good question.  Households are seeing their incomes rise very solidly.  Disposable income, which is what we have left after the government gets its cut, increased moderately in February.  That came after a huge jump in January, so we continue to build on the gains.  Even adjusting for inflation, income improved and over the year, the gain was strong – 4%.  February marked the fourth consecutive month that spending power rose from the year before by 3% or more.  You have to go back to 2006 to find that long a trend, which really is not that long.  It just shows how miserable earnings growth has been for so long.  The one disappointing aspect of the income increase was that wages and salaries posted only moderate gains.  We need to see that component rise faster if workers are to feel comfortable enough to spend a lot more.  Indeed, spending was up only modestly and adjusting for inflation, actually fell a touch.  However, much of the decline was due to a large drop in vehicle sales.  There isn't any indication that the vehicle makers are worried about demand, so let's chalk at least some of that up to the winter weather.  Sales of nondurable goods were solid and there was also a rise in services demand.  That is key.  The savings rate hit its highest rate in over two years, as households continue to straighten out their finances.  On the inflation front, price increases remain muted.  The rise is far from strong enough to provide the Fed with an excuse to start raising rates.    
 
Pending home sales improved in February to its highest level since mid-2013, according to the National Association of Realtors.  Solid increases in the Midwest and West more than offset modest declines in the Northeast and South.  Pending home sales, an indicator of near-future sales, rose by double-digits from last year.  The housing market just may be starting to heat up.

MARKETS AND FED POLICY IMPLICATIONS: It's beginning to look like déjà vu all over again.  Last year, the bad winter weather led to a sharp decline in activity in the first quarter.  While this year, first quarter growth will not be negative, it will not likely be very solid either.  But let's not forget that growth in the last three months of 2014 was strong and this year, incomes are growing even faster than they did last year. Slowly but steadily, the gasoline dividend will start kicking in and that too should help consumption.  In addition, it looks like the housing market may start adding to growth again, so there is every good reason to think that the first quarter will be the weakest quarter of the year.  Investors should like these reports but too many are still hanging on to every word Fed Chair Yellen speaks.  The great likelihood is that rates are going up this year: The question is when, not if.  So it is time that people start thinking about what the markets will do when the Fed actually does what we all know they are going to do.  It appears, though, that people want to run with low rates as long as possible and worry about higher rates when they actually see them.  I guess that has been good strategy for quite a while.  How long it will remain so is the $64 billion question.

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