After the price drop in oil consumers have not spent their gas savings. would spend most According to a survey of 4,500 consumers by Visa Inc. in early January, consumers are saving half of their newfound wealth from lower gas prices—using 25% to reduce debt and spending the remainder on small purchases like groceries, clothing and fast food. The personal savings rate jumped from 4.3% in November to 4.9% in December, according to the Commerce Department. These statistics help explain why retail spending, after excluding gas purchases, were flat in January after falling 0.2% in December.
Since October, the Institute for Supply Management’s (ISM) overall purchasing managers index (PMI) of manufacturing has fallen from 57.9 to 53.5 in January, with each successive month showing more slowing. Readings above 50.0 indicate expansion, so while January’s tally is still positive, it was the lowest level since January 2014 when the polar vortex chilled the economy. As we expected, the stronger dollar is progressively slowing exports. Business investment fell 0.6% in December, marking four consecutive months of decline for the first time since 2012. Consumer spending and income, manufacturing activity and business investment ended 2014 on a soft note and showed no signs of picking up during January. Although the Commerce Department will revise its initial estimate of fourth quarter GDP, it is unlikely the economy grew faster than 3%, and it likely won’t in the first quarter either.
The suspension of the EUC program might have accounted for most of the increase in jobs, possibly reflecting the unintended consequences of the extended EUC program.
An alternate measure of the labor market, probably provides a better measurement of the actual amount of slack in the labor market. This rate iincludes those working part time who would prefer full-time employment. In January, there were 6.8 million workers who fit into this category—a significant group. The rate also includes those who are marginally attached to the labor market, since they still want to work but have become discouraged. In January there were 6.5 million discouraged workers who were still looking in from the outside of the workforce. When these 13.3 million workers are included in the calculation, the amount of slack in the labor market soars from the 5.7% official January U3 unemployment rate to 11.3%—a spread of 5.6%.
While a further decline in the U3 unemployment rate is sure to make some Fed governors uncomfortable that the pressure is on to raise rates, we think a majority of the Federal Open Market Committee (FOMC) members will take a more holistic view of the labor market that includes the U6 unemployment rate and the absence of solid wage growth.
