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Investing Specialists

Why Is Spending So Far Ahead of Incomes?

Even as consumption numbers seemed unreasonably and inexplicably strong in February, income numbers looked incredibly weak.

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The highlight of the week turned out to be Federal Reserve chairman Ben Bernanke's comments suggesting that the economy might not be as strong as it looks, and that he would entertain additional easing measures if it performs worse than expected. Rather than panic over the potential weakness, stock and bond traders embraced the thought that more quantitative easing was in the cards and equity markets soared. Go figure.

Personal income and spending data late in the week suggested that consumers were on yet another buying binge even as inflation-adjusted incomes appeared to falter. My personal thought is that the income data has been exceptionally erratic and subject to large upward revisions. Meanwhile, the booming consumption number includes strong auto sales in February that benefited from the previous month's powerful auto sales that somehow didn't make it into January's consumption number. Every dollar of auto sales goes into the consumption number, even if those sales are financed for over five years, distorting the relation between consumption and income. So beware the economist proffering warnings that the consumer is running on fumes. As long as employment continues to grow, the income data eventually has to follow. More news on the job front next week.

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