Personal Income and Spending (February)[morgan Stanley] $SPY

* Slightly weaker than expected report. Income was flat, with a soft reading for core wages and salaries that was likely largely a temporary weather impact added to by downside in miscellaneous smaller components. Spending gained 0.3%, a strong reading given a flat PCE price index. There was a marginal downward adjustment to spending growth in January, however, that lowered our forecast for real consumption all of Q1 to +3.4% from +3.5%, which trimmed our GDP estimate to +2.5% from +2.6%. Meanwhile, the core PCE price index rounded down to zero, leaving the year/year pace at +1.3% as expected -- same as the core CPI now, as the huge housing deceleration is less important in core PCE prices than in CPI.

* The upside in consumer spending in February reflected the surge in ex auto sales seen in the retail sales report, offsetting a pullback in motor vehicle sales and a sluggish gain in services. Early reports suggest a sharp rebound in auto sales in March, with temporary disruptions from weather and Toyota recalls fading and incentives having been stepped up. This should lead a 0.4% gain in real consumer spending in March on top of the as expected 0.3% gain in February and slightly downwardly revised 0.2% rise in January, which would combine for a 3.4% gain for the quarter. This would be the biggest quarterly gain in three years, and the acceleration through Q1 would leave Q2 with a good starting point for another decent increase.



Personal Income and Spending