Much of the recent economic data has been better-than-expected, and many economists are starting to believe that the U.S. is headed back to a 3 per cent GDP growth rate.
This is particularly encouraging given the recent payroll tax hike and the $85 billion worth of sequestration budget cuts that are rippling through the economy.
However, BlackRock’s Russ Koesterich warns that we aren’t completely in the clear.
In a new blog post titled “The Most Important US Economic Number Now,” he writes about the importance of the upcoming income and spending report. Here’s an excerpt:
But investors wondering about the outlook going forward for the US economy will want to watch one economic number in particular: February’s personal income figure, which is scheduled for release on March 29th.
Why is this number so important? While consumer resilience to the tax increase can partly be attributed to a stronger labour market, lower savings and low interest rates have also cushioned consumption. For instance, the US personal savings rate has been heading lower for most of the past four years and it plunged to 2.4% in January, the lowest level since late 2007.
But neither low interest rates nor low savings are likely to prove sustainable over the long term. The Federal Reserve is likely to eventually raise rates and without faster personal income growth, consumers are likely to run out of savings, especially considering the massive amount of debt they are still unwinding.
In other words, if consumption and the broader economy are to remain resilient going forward in the face of consumer deleveraging, they will need to be supported by an improving labour market leading to faster personal income growth.
Koesterich warns that if we don’t see a pickup in personal income, then the economy could hit a speed bump in the second quarter.
Read the whole post at iSharesBlog.com.