February PCE - Baby, It Was Cold Outside

By: Paul Kasriel | Fri, Mar 30, 2007
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In real terms, February Personal Consumption Expenditures (PCE) increased by 0.2% after January's 0.3% rise. It was a 0.5% increase in real service sector spending that yielded a positive change on overall real PCE. Real durable goods expenditures fell 0.1% and real nondurable goods expenditures fell 0.4%. Real PCE services increased 0.5%, fueled by a 9.5% rise in expenditures for household utilities (electricity and gas). As you may recall, February was considerably colder than usual. In fact, in terms of heating degree days, February 2007 was the coldest February since that of 1979. March warmed up. The question is whether households spent their March savings on utilities at the malls or saved these savings. Given that their saving rate remains at Great Depression level lows - that is, they are running a deficit - and given all the angst about the value of their main retirement nest egg, their homes, I have a feeling they did not hit the malls with vigor in March. The January-February average of real PCE suggests that first-quarter average real PCE is likely to come in at an annualized pace of about 3-1/2% -- down from the fourth quarter's annualized growth of 4.2%. Quarterly-averaging arithmetic and economic theory point to a further deceleration in real PCE growth in the second quarter. The February durable goods orders data reported earlier this week suggest that real expenditures on business equipment and software will contract for the second quarter in a row. Putting it all together, it looks as though first-quarter real GDP growth will be below 2-1/2%. The FOMC can live with that, but given the slower trajectory of real PCE growth, the ongoing turmoil in the residential real estate market and that "the magnitude of the slowdown [in business capital expenditures] has been somewhat greater than would be expected given the normal evolution of the business cycle," the Fed must be getting more nervous about the prospects for a recession later this year.

The FOMC might be nervous about the higher probabilities of a recession, but it has to keep up its guard about the prospects of an upside breakout in consumer inflation. The core PCE price index increased 0.3% month-to-month in February and 2.40% year-over-year. Most of the moderation in year-over-year core PCE inflation has been erased from its cycle high of 2.44% set back in August 2006. Although increases in the rent of shelter - explicit and imputed - continue to raise the roof on core inflation, apparel and medical care prices are accelerating. The faster pace of apparel prices could be due to the decline in the dollar. Rent increases are likely to moderate with condo-flippers desperate to bring in a little monthly income to help pay the mortgage, taxes, insurance and condo fees on their empty investments. And inflation is a lagging indicator. The FOMC surely is aware of all this but because it still does not have a lot of Street cred, it has to continue to threaten to commence again in raising the fed funds rate even though it is loathe to do so.



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

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