Bank of the West U.S. Outlook Report for October 3, 2014

  • by BPC Staff
  • on October 3, 2014
US Outlook Report: Taking the Temperature of the Consumer

Consumer spending was back on track in August, growing 0.5 percent in both nominal and inflation-adjusted terms from zero growth in July that was upwardly revised from   -0.1 percent. The August figure was somewhat above consensus expectations of 68 economists surveyed on Bloomberg. Real consumer spending increased 2.6 percent from August 2013, and grew at an impressive 6.5 annualized rate during the back to school season, the second best monthly reading this year.

Even more encouraging, consumers appear to have enough income to make these purchases without digging into their savings. The personal savings rate remained at a solid 5.4%.  This supports our forecast for stronger consumer spending in the fourth quarter.

So how is the Fed doing on reaching its dual mandate of full-employment and stable 2.0 percent inflation?

Following St. Louis Fed President James Bullard’s recent speech, we decided to put inflation and unemployment components into a simple objective function to see how far the economy is from the Fed’s dual mandate goals. One of the core assumptions here is that both inflation and unemployment are equally weighted.

Currently, the objective function value of 0.93 is extremely close to pre-crisis levels of 0.88, the six year average spanning from December 2001 to December 2007. The take away here is that FOMC is closer to its macroeconomic targets today than it has been for much of the time since 1960.  Analysis like this suggests the Fed might be behind the curve in normalizing interest rates.

To find out more, check this week’s US Outlook Report.