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Investing Specialists

Consumers Spend Less--Will Home Sales Acquiesce?

The needle on the economic compass wanders as stocks ride the wild side.

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This week was characterized by high volatility for the markets as rumors that China was selling its euro holdings sent the market into a tailspin, only to be followed by one of the best rallies of the year on Thursday when the Chinese formally denied the rumors. Housing data looked strong but not terribly indicative of future trends, while strong durable goods orders indicated a blazing manufacturing sector. Consumer incomes showed their best improvement of the year, while those same consumers held back their spending a bit, causing the savings rate to show a modest increase. Individual companies also continued to indicate that the European situation was not having much of an effect on European orders--at least not yet.

Consumer Incomes Up, Spending Flat, Saving Again?
Spending, which had been increasing faster than incomes for some time, slowed to near zero in April. The biggest cause was a falloff in auto sales related to expiring incentives, though other categories were a bit softer too.

Real personal incomes, the eventual wherewithal for consumer spending, continued to accelerate during the month of April. Thus, inflation-adjusted incomes have shown some decent improvement in 2010, as shown below.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.