Services Spending Is on a Strong and Improving Path
Good Economic News the Cynics Might Be Missing
When we disaggregate the PCE data, we find that price led to much of that weakness, while volumes remained solid. In other words, when you strip out the influence of the collapse in oil prices and the dynamic of new technologies’ downward influence on price, goods consumption is actually doing extremely well.
Further, services spending appears on a strong and improving path, and many services are just priced more efficiently than in the past. Indeed, the year-over-year growth rate in real services PCE, is near 2.8 percent, which is a fairly healthy level.
Market Realist – Most of the PCE weakness is due to lower oil prices.
The graph above compares WTI (West Texas Intermediate) crude oil (USO) prices with the YoY (year-over-year) inflation in PCE (personal consumption expenditure). As you can see, the PCE inflation fell along with the fall in oil prices. As mentioned above, the volume or the demand for goods hasn’t fallen. Also, oil prices started falling around this time last year. This means there will be a low base for inflation starting in July. This could lead to higher inflation rates soon.
In that case, the Fed can’t wait too long to hike the rates. If inflation starts rising, the Fed might have to hike rates soon. This could choke the economy. It could lead to higher volatility (VXX) and a spike in Treasury (SHY) yields.
Also, technology (IYW)(QQQ) is having a profound impact on inflation. The smartphone is an example. In one device you now have the capabilities that would have required purchasing a dozen or more devices years ago. The comparative savings are also significant. Have you bought a tape recorder or a radio lately?
Services spending appears to be on a strong and improving path
As you can see in the second graph, the real services PCE is on strong footing. It has been on an improving path over the last year or so. Currently, it stands at a healthy 2.8%. This is a clear sign that the economy is anything but weak. Continue reading to understand why the economy is actually improving.
Browse this series on Market Realist:
