INDICATOR: November Consumption and Income

KEY DATA: Consumption: +0.5%; Real Disposable Income: +0.1%

IN A NUTSHELL: "People are still spending and we actually got some income growth, though not a whole lot."

WHAT IT MEANS: November consumer spending, at least on the surface, looked pretty good. But as usual, the devil is in the details and those may not be as solid. It was a good month for car dealers and probably utilities, but it is unclear if household really bought a whole lot of other things. Spending on durables was strong, but we knew that since vehicle sales were at the highest annual pace in almost seven years. There was also a large rise in services spending, but that could be utilities as the weather was awful. Of course spending is spending, but when it comes to the economy, weather is not what we want to be the driving force for demand. On the other hand, nondurable goods purchases fell. Part of that was a decline in gasoline costs, so maybe that weakness was not as great as it appears. All those caveats aside, so far this quarter, inflation adjusted consumption is running at a 3.6% pace, which if that holds, could give us a better than expected fourth quarter growth rate than anyone currently has. But while it is unclear exactly what is going through the minds of consumers as far as spending is concerned, going forward it is all about incomes. Hoorah, there was a small rise in worker compensation. But the gains continue to lag spending so the savings rate fell again. That is fine since it is the holiday shopping season, but I suspect that people will not want to keep drawing down their bank accounts. As far as inflation is concerned, it remains totally tame.

MARKETS AND FED POLICY IMPLICATIONS: We have had two consecutive months of strong consumer spending so maybe all those Black Friday sales that started before Halloween did their jobs. That also may be the reason the retailers are complaining that the December numbers are not that great. It is nice to see that people were willing to spend despite the limited gains they see in their paychecks but how long that will continue is a real question. I would not be surprised if the December and first quarter consumer spending numbers are disappointing. All said, though, investors should like this report and it will make those at the Fed who thought that tapering is a good idea exhale a little.