The USD continued its correction this past week, which was triggered by the removal of the word "patience" from the FOMC statement. This in turn caused the market to re-evaluate the timing of the Fed’s first rate hike from June to sometime in Q4. The currencies that performed worse than the USD were the AUD, CAD, and GBP as each one had its own cross to bear. The AUD closed at its low for the week as the market is pricing in additional interest rate cuts from the central bank with its next meeting on April 7. The CAD initially received a boost from comments made by Bank of Canada Governor Poloz on Thursday, which suggested that near-term interest rate cuts were unlikely. However, the gains in the CAD quickly dissipated after the sharp sell-off in oil ahead of the weekend. Meanwhile, the GBP was weighed down by low inflation, dovish comments by various Bank of England members, and uncertainty ahead of the May federal election. The latest polls show that Labour has 36 and is now ahead of the Tories with 32, Ukip has 13, Liberal Democrats have 8, and the Greens hold 6. The early polls point to a confusing and complicated post-election power sharing coalition, which will continue to weigh on the GBP even after the May 7 vote.
Lately, it seems that U.S. economic data is consistently missing the mark. We are not saying that the data is bad – not at all – what we are saying is that it has been less than stellar. A quick view of Citi’s Economic Surprise Index captures what we are saying. The index gauges how the actual economic activity compares to expectations – so the data can be very good but miss expectations. Notice how the indicator when compared to Europe and China shows stark contrast.
United States Consumer Spending
There are days when U.S. economic data demonstrate the U.S. economy that is finally getting on track for accelerated growth. Other days, the statistical data demonstrate that we are stuck in an anemic "new normal" that has beleaguered the economy the last few years. Although we rarely get an unambiguous picture from economic statistics, recent reports have proven particularly confusing. With the Federal Reserve now primed to begin tightening monetary policy, there is also a lot riding on what those reports disclose.
Encompassing roughly 70% of total GDP, consumer spending has been the life force of U.S. economic growth for many decades. Over this cycle, household incomes have been inhibited by persistent unemployment and the snowballing effects of slow wage growth. To make matters worse, nondiscretionary expenses (e.g., taxes, medical care and educational costs) have climbed much faster than income. Since the average household spends the majority of what it earns, consumption growth has been profoundly constrained by the lethargic growth of discretionary income.
Consumer spending in the U.S. increased 0.10% in February of 2015 over the previous month. Consumer spending in the U.S. averaged 0.55% from 1959 until 2015, reaching an all-time high of 2.75% in October of 2001 and a record low of -2.02% in January of 1987. Personal Spending in the U.S. is reported by the U.S. Bureau of Economic Analysis.
Contrary to the expectation that falling energy prices would cause other retail sales to rise, however, the sales statistics actually fell over the last three months. Retail sales declined 0.6% in February after falling 0.8% in January and dropping 0.9% in December. We should not have been surprised. Keep in mind that gasoline sales also count as consumer spending, so the majority of the drop in the retail numbers came from reduced sales of gasoline. For overall consumer spending to rise, Americans need to spend more money on other goods or services than they save on gasoline. That means that unless consumers dip into savings or aggressively spend any additional income they receive, we probably should not see a large increase in overall consumer spending. There is also evidence that much of the growth in other spending will lag the decline of gasoline sales by a several months.
The savings on gasoline come at the rate of $10 to $20 per week, as drivers recurrently fill their tanks. While that is enough to fund the purchase of small ticket items like restaurant sales, it would take some time to accumulate savings for larger purchases. That means reduced energy costs should be expected to reduce consumer spending during the initial months of a transition to lower energy prices, but much of the increase in spending on larger-ticket items would likely come after some time has passed.
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