The Federal Reserve’s latest statement contained an unusual hint about their optimism for better economic growth this year.
“Consumer sentiment remains high,” the statement said, breaking from the usual drone about recent economic trends.
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Sentiment – despite its impressive levels of late – is often too fickle an indicator for central bankers to put much stock in, and its correlation to spending isn’t perfect, so the context of the Fed’s reference is important. Real disposable incomes rose 6.2 percent in the first quarter, the most in more than two years. Yet so far, consumers are banking much of their cash.
Fed policymakers’ reference to upbeat sentiment suggests their view is that “consumption is going to rebound,” said Michael Gapen, chief U.S. economist at Barclays Plc. Put another way, all these high animal spirits are going to pay out in the form of shopping sprees.
Here are three indicators to watch for the consumer comeback:
n Personal spending. Personal consumption expenditures as measured by the Bureau of Economic Analysis has underperformed so far this year, causing some to question whether the windfall from lower prices at the pump was stashed away for good.
“I think Fed officials were disappointed with the pace of consumer spending in the first quarter,” said Dana Saporta, an economist at Credit Suisse in New York. “In order to feel confident” that it is time to raise interest rates, “they would have to see a rebound sometime soon.”
n Autos. Auto sales have been a rare reliable bright spot in consumer spending. Fed officials will probably remain comfortable with this industry’s data as long as purchases hold above the 16 million rate of annual purchases that the U.S. has seen over the past year.
n Homes. While tighter credit conditions after the last recession and limited inventories have held some potential buyers back, recent mortgage purchase applications hint at a solid spring rebound for the industry.
Economists at Goldman Sachs are projecting “gradual improvement in the housing market” this year, with total (new and existing) home sales rising to 5.51 million from 5.36 million in 2014, according to an April 6 research note. •
