August 30, 2010 – 10:30 a.m. CT

Spending and Income Data Less Reassuring Than Appears at First Glance

Many were heartened by the initial report that consumer spending surged 0.4 percent, twice the pace of income growth during the month of July, after posting no growth during the month of June. A rise in vehicle sales accounted for some of the upside surprise. The real mover, however, was spending on services which surged as people turned up their air conditioning in what was recorded as the hottest July on record for the nation. This will no doubt curtail spending elsewhere in the economy, especially as those bills come due in August and September.

Separately, I returned from the Kansas City Fed's annual Jackson Hole, Wyoming meeting with central bankers from around the world. I will be writing more about where the Fed is and what they are likely to do next in the September edition of Themes on the Economy. Suffice it to say, however, that the mood was somber, and we all left with more questions than answers about what (if anything) could be done to improve economic conditions. Members of the Fed are particularly divided about what course of action should be taken, a fact that Fed Chairman Ben Bernanke openly acknowledged in his speech on Friday morning. He also went out on a limb and promised to corral the voices of dissent by assuring that the Federal Open Market Committee (FOMC) would act if necessary to stimulate further. The consensus was high among those who are closest to Ben that the Fed will be back in the game of actively expanding the size of its balance sheet with additional asset purchases well before the end of the year. It is interesting to note that the Bank of Japan resumed quantitative easing (asset purchases) to fight a Chinese-induced appreciation of its currency at an unscheduled meeting last night.

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