The Commerce Department reported this morning that income and spending grew slightly in July while inflation pressures at the consumer level were benign.
Personal incomes grew by 0.2% last month while spending rose by 0.4%. The Fed's preferred measure of consumer price inflation, the personal consumption expenditure index, a separate component of the income and spending report, rose 0.1% in July and was up a meager 1.4% on a year-over-year basis. With personal savings continuing to hover near 6.0%, it is clear consumers are focusing on getting their finances in order rather than aggressively increasing their spending. Rising personal savings suggests to many analysts the engine that drives more than 70% of our domestic economic activity is likely to perform below its potential for months yet to come.
Against such an economic backdrop stocks will likely continue to slump as capital flows from riskier asset classes into the safest investment vehicles available. The good news here is that for the time-being, dollar denominated assets like Treasury obligations and mortgage-backed securities are about the-only-game-in-town that perfectly fits the "safe haven" requirement for both domestic and global investors. As long as this condition prevails it will tend to support the prospects for steady to perhaps fractionally lower mortgage interest rates.
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