Consumers sock funds into savings

Personal income in April unexpectedly jumped 0.5% due to one-time factors, but spending fell 0.1%, underscoring nervousness among consumers. As a result, the savings rate improved from 4.5% to 5.7%.

One thing that bothers me just a little was a 0.3% rise in the core Personal Consumption Expenditures Index - a broad measure of inflation that excludes food and energy. With GDP tumbling at its fastest pace since 1958 and demand in hibernation, you would think inflation would be virtually nonexistent. Although the pricing data suggest we are stepping back from the threat of deflation (Deflation Monster), we don't want to see rising inflation as an expected recovery begins later this year.

I'm guessing that the lingering impact from high commodity prices last year is still affecting the price data. And since labor costs - the largest cost for most businesses - are barely rising, the bump we saw in April is likely to be temporary.

Confidence vs. spending

Consumer confidence has been improving but rising sentiment is not yet showing up in spending. If you look at the latest survey from the Conference Board, which measured sentiment in May (spending data is for April), you'll see that the improvement in confidence is occurring because many expect the economy to pick up later in the year.

The present situation showed little improvement because consumers are still worried about their jobs and home prices remain in a declining trend. Consequently, spending remains lackluster.