Data Still Indicate Lethargic Economy
-- June 27, 2003

Though bullish economists used the spending increase to justify their forecasts for a vigorous rebound in the second half of the year, they're really stretching things. A 0.1% rise is hardly worth writing home about, especially when you consider what's happening on the price side.

The personal consumption expenditures (PCE) price index, a measure of inflation that is tied to spending and watched closely by Federal Reserve Chairman Alan Greenspan, dipped 0.1% last month. Excluding food and energy, the PCE index was unchanged in May and only 1.2% higher than a year earlier. That's the lowest annual rate since a gain of 1% in September 2001, the month of the terrorist attacks. Apart from then, the May gain was the smallest since October 1965. No wonder Fed officials are so worried about deflation!

And some areas of spending showed weakness in May. For example, spending on durable goods, such as autos, appliances and other expensive items, eased an inflation-adjusted 0.1% in the month. Considering that some auto makers are practically giving their vehicles away at this point -- GM just boosted incentives on several vehicle models to $3,500 and $4,000 -- that's not a very good sign.

Another report released today also points to a sagging economy: The University of Michigan's consumer confidence index fell to 89.7 in June from 92.1 last month. It won't take long for this mountain of bad news on the economy to send the stock markets into a major decline.

related article: Consumer Spending Rises 0.1%