Rise in US consumption for August could be misleading

Although Commerce Department data for August showed a rise in August and a moderation of core inflation, this data should be considered warily as they may be a result of unusual incentives.  Consumer confidence and housing are still down.

Consumer spending rose 0.6% in August, the largest increase since April and more than expected.  The rise was underpinned by strong sales of durable goods, automobiles and weather-related services.  However, analysts have noted that retailers offered discounts and other incentives to move product, especially 2007 cars.

The core personal consumption expenditure deflator, posted its smallest year-over-year gain since February 2004. The core deflator index, which excludes food and energy prices, rose 1.8% on an annual basis, continuing a downward trend since February.  This adds to the confidence the US Fed might have in reducing interest rates again.  However, we still believe this would be dangerous as it contributes to moral hazard (attested to by the spike in stock markets since the rates were dropped on 18 September) and would reduce their ability to reduce rates in future, when it may be more needed.

Separately, construction spending increased 0.2% in August after a 0.5% decline the month before, though many had expected another drop. Nonresidential construction offset a decline in home building.

This data continues to give mixed signals, contributing to uncertainty which make business planning difficult.   It is pragmatic to focus on core business in this difficult environment and be prepared for a downturn – it is easier to rise with the tide, than stay afloat while everything else is sinking.

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