The Independent Market Observer

Monday Update (on Tuesday): Personal Spending Beats Expectations in April

Posted by Sam Millette

This entry was posted on May 31, 2022 11:08:10 AM

and tagged In the News

Leave a comment

In his Monday Update, Commonwealth’s Sam Millette highlights durable goods orders, personal income and spending, and the minutes from the Fed’s May meeting.Last week’s important economic data releases included a look at April’s durable goods orders report and the minutes from the most recent Fed meeting. April’s personal income and spending reports were a highlight, as spending beat expectations for the month. This week’s highlights will include reports on consumer and business confidence and employment in May.

Last Week's News

On Wednesday, the preliminary estimate for the April durable goods orders report was released. Orders for durable goods grew by 0.4 percent during the month, slightly below the 0.6 percent increase expected. Core durable goods orders, which strip out the impact of volatile transportation orders, grew by 0.3 percent, against calls for a 0.6 percent rise. This report marks two consecutive months with core durable goods orders growth. Core durable goods orders are often viewed as a proxy for business investment, so this trend is a good sign for overall business spending. Business spending has seen solid growth throughout most of the year, as businesses have invested in equipment and other capital expenditures to raise productivity and meet high consumer demand. Looking forward, given the tight labor market, continued business investment is expected to start the summer season.

Wednesday also saw the release of the FOMC meeting minutes from the Fed’s May meeting. The central bank hiked the federal funds rate 50 bps and announced plans to reduce its balance sheet throughout the rest of the year and into 2023. Given recent changes to monetary policy, the May meeting minutes were widely anticipated by economists and investors. The Fed's discussions showed broad support for the 50 bps rate hike in May, sentiment likely to continue at the June and July meetings. The minutes also indicated the belief by some Fed members that the central bank should look to sell mortgage-backed securities from its balance sheet later in the year or in 2023. All in all, no major surprises were hidden in the minutes. They demonstrated the Fed’s commitment to tightening monetary policy to tamp down inflationary pressure. Higher rates are an encouraging sign the Fed sees the economy as strong enough to withstand tighter monetary policy. Nonetheless, rate hikes and balance sheet reductions could negatively affect the markets, so updates from the Fed will be closely monitored throughout the year.

On Friday, the April personal income and personal spending reports were released. Personal spending increased by more than expected, with the report showing a 0.9 percent increase in April spending against calls for a 0.8 percent rise. March’s spending growth was revised up from an initial report of 1.1 percent to 1.4 percent. Some of the spending growth in March and April is due to rising prices but real personal spending figures beat expectations in April, signaling high consumer resilience despite inflationary pressure. This strong result, which echoes the better-than-anticipated growth for retail sales in April, was driven by increased consumer spending on both goods and services. Personal income increased by 0.4 percent in April, slightly below the 0.5 percent increase expected. Still, despite this modest miss against forecasts, this results represents a solid result. It marks seven consecutive months with rising incomes and highlights the strength of the labor market recovery.

What to Look Forward To

On Tuesday, the Conference Board Consumer Confidence survey for May was released. Consumer confidence declined by less than expected during the month. The index fell from an upwardly revised 108.6 in April to 106.4 in May, against calls for a further drop to 103.6. This result left the index above the recent low of 105.7 recorded in February 2022. Confidence has been challenged since last summer largely due to concerns about inflation and the pandemic. The index hit a post-lockdown high of 128.9 in June 2021. Since then, the declines we’ve seen highlight the negative impact of concerns about inflation and Covid-19 infections over the past year. Looking forward, we’ll likely need to see further signs of slower inflation before confidence returns to the highs of last summer. That said, although confidence has been challenged over the past year, consumer spending growth has remained relatively strong. This fact is an encouraging sign that consumers remain willing and able to purchase goods and services, despite rising concerns about the economy. 

On Wednesday, the ISM Manufacturing index for May is set to be released. Economists expect the index to fall modestly, from 55.4 in April to 55 in May. This is a diffusion index, where values above 50 indicate growth. Accordingly, this result would signal continued expansion for manufacturers, just at a slightly slower rate. We’ve seen solid improvements for manufacturing output throughout the course of the year, supported by high demand for manufactured goods. That said, a potential slowdown in growth in the months ahead is possible, given the headwinds created by rising prices for goods and labor. Slower growth is still growth, however, so the expected result would indicate continued expansion for manufacturers despite these headwinds.

On Friday, we’ll see the release of the May employment report. Economists expect to see 329,000 jobs added during the month, down from the 428,000 jobs added in April but still strong on a historical basis. If estimates prove accurate, the May report would mark 17 consecutive months with strong job growth, highlighting the impressive labor market recovery over the past year and a half. The underlying data is also expected to show positive signs. The unemployment rate is set to drop from 3.6 percent in April to 3.5 percent in May. In February 2020, the unemployment rate bottomed out at 3.5 percent, so a return to this historically low level in little more than 2 years would be another example of the labor market’s strong improvement over the course of the pandemic. Finally, wage growth is expected to increase by 5.2 percent on a year-over-year basis in May, down from 5.5 percent in April. This would be a positive result for the Fed, given concerns about widespread inflationary pressure.

We’ll finish the week with Friday’s release of the ISM Services index for May. This measure of service sector confidence is expected to drop from 57.1 in April to 56.3 in May. As with the manufacturing survey, this is a diffusion index, where values above 50 indicate expansion. Service sector confidence has dropped this year, after hitting a record high of 68.4 in November 2021. Rising medical risks earlier in the year and persistent inflation have served as headwinds in 2022. That said, due to high consumer and business demand for services, confidence should remain largely in line with pre-pandemic levels in the months ahead. We’ve seen spending patterns start to shift from goods to services over the past few months. Pent-up demand and diminishing pandemic fears have boosted service sector spending.

That’s it for this week—thanks for reading!


Subscribe via Email

Crash-Test Investing
New call-to-action

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®