Much of the increase, which was the largest in 11 months, was due to lower taxes and benefits from government stimulus payments.

TO BE NOTED: From the FT:

"US personal incomes show surprise rise

By Alan Rappeport in New York

Published: June 1 2009 14:05 | Last updated: June 1 2009 15:34

US consumers curbed their spending for the second month running in April, in spite of the first rise in income this year, as they continue to cope with the recession and fears of more job cuts.

Personal consumption expenditure fell by 0.1 per cent or $5.4bn last month, less than economists expected and a smaller fall than the previous month’s 0.3 per cent.

Incomes rose for the first time in four months in April, increasing by 0.5 per cent, or $58.2bn, and dashing predictions of another drop. Much of the increase, which was the largest in 11 months, was due to lower taxes and benefits from government stimulus payments.

The commerce department’s closely-watched gauge of prices rose by 0.1 per cent in April, following a slight dip in March. Excluding food and energy, prices rose by 0.3 per cent after rising by 0.2 per cent for two consecutive months. On the year the index was up by 1.9 per cent.

Meanwhile the savings rate, which is measured as the proportion of income left after spending and taxes, rose from a revised 4.5 per cent in March to 5.7 per cent in April, a 14-year high. Economists predict that the savings rate could reach 8 per cent as household wealth has collapsed.

“US rebalancing continues and the quicker the adjustment the more promising are the prospects for consumer spending in the longer-term,” said Alan Ruskin, strategist at RBS Greenwich Capital.

Also offering promise on Monday were figures showing that US manufacturing is shrinking at a slower pace than before, adding to hopes that the worst of the recession is over. The Institute for Supply Management’s factory index rose to 42.8 per cent last month from 40.1 per cent in May, as new orders grew for the first time since November 2007.

”While employment and inventories continue to decline at a rapid rate and the sector continued to contract during the month, there are signs of improvement,” said Norbert Ore, ISM chairman.

Export orders also jumped in May, rising to the highest level since the collapse of Lehman Brothers last September.

“ISM is being lifted partly by a catching-up or rebound after the post-Lehman plunge, during which time companies seem to have slashed their spending more deeply than was sustainable, and partly by an unfreezing of world trade,” said Ian Sheperdson, chief US economist at High Frequency Economics.

Separately on Monday, commerce department figures showed that US construction spending unexpectedly rose in April on the back of stronger investment commercial construction. Construction spending grew by 0.8 per cent to $968.7bn in the month, but is off by 10.7 per cent from the same period a year ago.

Private construction climbed by 1.4 per cent in April, while public construction slipped by 0.6 per cent. Residential construction rose by 0.7 per cent, lifting hopes that the stricken US housing market could be starting to bottom."

an increase in cash available should cause the price level to rise, but only if you hold the savings rate constant

TO BE NOTED: From Accrued Interest:

"Inflation: Not this ship, sister

Alright so the Fed isn't going to defend the 10yr at 3%, and in fact appears to be targeting the belly of the yeild curve. That doesn't change the fundamental problem of deflation. Near term, based entirely on technicals, I've made a small short play in Treasuries. But I'm really just looking for a new entry on the long-side.

Almost exactly 2-years ago, I made my now famous (in my own mind) analogy of inflation to a Monopoly game. Basically my point was inflation wasn't about the price of any given property (or good) but the price of all the properties. Allowing any given good (at the time it was energy) to rise isn't, in and of itself, inflation.


Now there is fear that the Fed and Treasury's activities, especially the Fed's recent panache for "crediting bank reserves" (which means printing money). Here is the chart for M1 and M2 up 14% and 9% respectively in the last year.

Back to my Monopoly analogy. We might think of the M's as the actual multi-colored cash that each player has. As I demonstrated two years ago, an increase in cash available should cause the price level to rise, but only if you hold the savings rate constant.


Speaking more technically, you could say that an increase monetary base would have some multiplied impact on transactable money. In your textbook from college, this only involved banks and their willingness to lend. Actually, most often text books assume banks want to lend as much as they are legally allowed, which isn't the case right now. But I digress.


The securitization market makes this all much more complicated. The supply of loanable funds isn't just a function of cash in the banking system, but also cash invested in the shadow banking system. Right now net new issuance in ABS (meaning new issuance less principal being returned in old issues) is negative, meaning supply of funds from the shadow banking system is contracting.

This contraction of funds doesn't show up anywhere in the Ms, at least not directly, but obviously it matters in terms of consumers ability to buy goods. And it isn't just about availability of credit, which had everything to do with liquidity. Its about demand for credit also. Consumers want to save, they don't want to borrow right now. The following chart of household liabilities shows consumers actually decreased their total liabilities in 2008, the first year-over-year outright decline since the Federal Reserve began keeping the data in 1952.

Consumers are like a Monopoly player who has mortgaged all his properties. Passing GO doesn't cause him to buy more houses, it causes him to unmortgage his properties! That isn't inflation!


Getting back to consumers, it isn't clear to me that consumers are actually running out of money. Check this chart of the Household Financial Obligation Ratio, basically a debt service coverage ratio for consumers.

So consumers might not have to repay debt all at once, which is nice. It means a second-half recovery of sorts remains in play. But the large losses in assets coupled with out-sized debt ratios are going to cause consumers to keep saving at an elevated level. Check out liabilities as a percentage of disposable income.

This isn't a perfect ratio, since liabilities is a stock and income is a flow. But with declining asset values (both homes and financial assets), means that consumers are actually going to have to rely on incomes to pay debt service. Or for that matter to qualify for loans. So I'd think this ratio moves back toward 100%. That implies $3.6 trillion. TRILLION. It will be repaid over time to be sure, but it will remain a continual drag on consumer spending levels.

So keep this in mind when you think about the size of Fed/Treasury programs. $3.6 trillion. Are we worried about $800 billion for the "Stimulus Package" or the $1 trillion revised TALF? Not in terms of inflation.

I'm looking forward to the day when I'm worried about inflation. It isn't today."