Consumers retreat, savings grow

Yesterday's improvement in consumption spending that was contained in the advanced GDP report is being tempered somewhat today by a 0.2% drop in consumer spending last month, suggesting that the quarter ended on a soft note. Personal income also came under modest pressure but the savings rate increased from 4.0% to 4.2%.

The data show that despite signs spending may be stabilizing and consumer confidence is slowly improving, consumers remain uneasy and the economy is not yet on solid ground.

In the meantime, the rate of inflation held steady in March. The core Personal Consumption Expenditures Index, a broad measure of prices that is closely followed by the Fed, rose 0.2% for the third month in a row.

There has been plenty of chatter about deflation and the Fed reiterated yesterday that "inflation could persist for a time below rates that best foster economic growth and price stability." Nonetheless, the biggest two-quarter drop in GDP since 1957 has yet to bring the rate of price increases to dangerously low levels.

This may partly be occurring due to the residual impact of the steep rise in commodities and oil prices that occurred in much of the decade. Commodity prices have since tumbled but are off the lows amid indications that economic activity may be getting ready to stabilize, so the risk of deflation seems low in my opinion.

Wage growth, however, is nearly flat, and in some cases, is actually falling. And the smallest rise in Employment Cost Index on record in 1Q bears watching since it may hinder spending and raise the odds of inflation falling below the Fed's implied target of 1-2%.