Trump Economics Vindicated by March Consumer Spending, Inflation, and Income Data

INDIANAPOLIS, INDIANA - APRIL 26: US President Donald Trump gestures to guests at the NRA-ILA Leadership Forum at the 148th NRA Annual Meetings & Exhibits on April 26, 2019 in Indianapolis, Indiana. The convention, which runs through Sunday, features more than 800 exhibitors and is expected to draw 80,000 guests. …
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JOHN CARNEY

Consumer spending jumped by more than expected in March even while inflation pressures in the economy largely declined.

Personal-consumption expenditures rose 0.9 percent in March, the Commerce Department said on Monday. Economists had expected a 0.7 percent rise.

Prices were basically flat for the month. The personal-consumption price index, which is the Federal Reserve’s favorite gauge of inflation, rose just 0.2 percent. Excluding volatile food and energy prices, so-called core PCE prices did not rise at all. Economists had expected o.3 percent for the overall index and 0.1 percent for core prices.

The news on prices bolsters President Donald Trump’s position that the Fed should cut rates.

“I personally think the Fed should drop rates; I think they really slowed us down,” Trump said last month. “There is no inflation. In terms of quantitative tightening it should actually now be quantitative easing.”

That view was also echoed last month by Trump’s top economic adviser, National Economic Council director Larry Kudlow and Trump’s Federal Reserve pick, Steven Moore.

Trump has been strongly criticized for voicing his views on the Fed’s monetary policy. Critics say the president’s comments jeopardize the independence of the Federal Reserve despite Trump’s reassurances that he is not seeking to pressure the Fed but only explaining his own views.

After months of criticism from the Trump administration and the president, the central bank changed its stance earlier this year from gradually raising rates to promising to be patient on future hikes. Economic data in the intervening months has consistently demonstrated that the Fed had over-estimated inflationary pressures in the economy, under-estimated downward price pressures from slowing growth around the world, both points that the president and his advisers had highlighted earlier.

The Fed also released personal-consumption data for February on Monday, playing catch up with data whose release was delayed due to the partial government shutdown. This showed consumer spending and prices rising 0.1 percent in February. Economists had expected a slightly figures for both.

January’s consumer spending was revised up from 0.1 percent to 0.3 percent, suggesting that the consumer was more confident at the start of the year than initial figures suggested. January’s price index was revised up to flat from an initial report of a 0.1 percent decline.

Spending on durable goods bounded back in March, jumping 2.3 percent after contracting 1.1 February and 0.1 percent in January, another sign of strengthening consumer confidence and potential economic acceleration. The Commerce Department said increased spending on goods was widespread and–in much needed good news for the auto industry–spending on motor vehicles and parts was the leading contributor.

Personal income grew just 0.1% in March after rising 0.2 percent in February, falling short of expectations. This may explain some of the low inflation and will probably give the Federal Reserve comfort that it made the right move when it adopted its patient stance.

The lower than expected personal income figure, which includes wages, benefits, and investment income, masked better news on wages and salaries. Paychecks rose a strong 0.4 percent,  following gains of 0.3 in February and 0.4 percent in January. These gains were offset by a decline in interest income, likely a reflection of the decline in interest rates since the Fed went to patience. That’s a mix that favors the Trump administration’s populist economic stance.

On the downside, however, farm incomes also dropped slightly. While some of the retaliatory tariff pressure on U.S. agriculture has lifted because China has increased purchases in an effort to win a trade deal with the U.S., many U.S. farms in the Midwest and southern California were hit hard by floods in March.

In additional good news for the Trump administration, Monday’s data showed no signs that tariffs are raising prices on consumers or hurting wages of workers. Critics of the Trump administration have often claimed, without evidence, that tariffs were acting as taxes on consumers, raising prices, or hurting workers in industries subject to tariffs.

Tariffs cannot raise consumer price levels generally but can shift prices among consumer goods unless incomes rise or savings fall. Businesses cannot pass higher costs on to consumers unless consumers have more to spend, spend less on other goods, or dip into their savings. The personal saving rate, however, remains high–7.3 percent in February and 6.5 percent in March. January’s saving rate was revised to 7.2% from an initial estimate of 7.5%.

On Friday, the government said the economy grew at an annualized rate of 3.2 percent, much stronger than the 2.3 percent growth economists expected. The unexpected strength was driven by a stronger-than-expected rise in exports and a rise in inventories that added 0.65 percent. That prompted concern because consumer spending slowed to 1.2 percent in the first quarter compared with 2.5 percent in the final three months of 2018, leading some to fear that growth could slow by more than expected in the second quarter as business held off on production while selling down that big build inventories.

Monday’s data showing accelerating spending should quiet some of that fear. If consumer spending continues to pick up, the first quarter build in inventories will no longer look like a source of weakness but a foreshadowing of strength.

 

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