In Friday's GDP report, the deflator for personal consumption expenditures
(PCE), minus food and energy, was shown to have increased at a 2.2% annualized pace, above the Fed's target range of 1.75% to 2.0%.
Today's data on personal income and consumption for the month of December indicate that much of that above-trend gain occurred early in the quarter, as the PCE core deflator rose just 0.1% in December.
Nevertheless, the PCE core deflator was revised upward for the previous two months, and the annualized pace for the past five months is 2.3%. The spending data show solid upward momentum that could boost first-quarter GDP to 4%.
PCE for December rose a robust 0.9%, following a gain of 0.5% in November (revised upward from 0.3%) and 0.1% in October (suppressed by hurricanes).
The momentum factor on spending is important because of the way GDP is calculated. It is calculated as the average of one quarter vs. the average of another. The momentum seen in one quarter can have a large bearing on the subsequent quarter because of "base effects." So, if the economy were to see, for example, sales in a particular product at seven, eight, and nine units in October, November, and December, respectively, the average would
be eight, but sales of nine units in January would put the sales level above the fourth-quarter average (despite an unchanged reading vs. December).
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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