Farrell: They're Watching the Wrong Numbers

Too much news attention last Friday focused on consumer spending.

For consumers to spend it, they, of course, need to make it, so the report on personal incomeshould be the more important data point. At first blush, the report that came out on Friday offered little in the way of headline relief. Personal income was flat, as expected, but it seemed to offer no hopeful guidance as well. But dig in a bit and there were encouraging signs. Brian Wesbury, of FT Economics, did a superb job of dissecting the numbers. He saw that within the mass of data was a note that "private-sector wages and salaries" were up 0.1% in July. This seems meager but it was the first gain in this category since August of 2008. "Non-farm proprietors' " income—an extended way of saying small business income—posted a gain of 0.8%, the most since 2006. Since the consumer is still over 70% of economic activity, it is crucial that these metrics start to show improvement.

Consumer spending is closely correlated to consumer income, not to consumer sentiment surveys. You would rather have a positive survey result than not, but it is sort of like driving a golf ball 300 yards only to consistently three-putt. Incomes need to rise. Presumably a confidence survey will sooner or later reflect economic reality, but the initial reads are often headline-driven. Having just trashed the usefulness of sentiment surveys, let me give you the results of another one anyway. A European confidence survey that combines business execs and consumers jumped strongly in July to 80.6 from 76 the prior month. I mention it only because it bolsters my case that the situation is getting better. If it didn't, I think I have laid the groundwork for ignoring all those over-hyped sentiment surveys!

690,000 clunkers were turned in. The average mileage the clunkers allegedly got was 15.8 miles per gallon. The cars bought tested at an average of 24.9 miles per gallon. That's roughly a 9-mile-per-gallon advantage. If the average car is driven 15,000 miles a year (and I have no idea what the average is; I'm guessing), then gas usage for those cars involved goes from about 949 gallons a year to 602 gallons, a reduction of 347 gallons of gas per year. If gas is around $3, then the savings are a little more than $1000 per year. That's a noticeable savings for the average family. 347 gallons saved times 690,000 vehicles is 239,430,000 total gas saved. That sounds like a lot until you realize that, at the height of usage in 2007, Americans were using 400,000,000 gallons of gas every day. So we just saved a bit more than half a day's usage. The cash for clunkers program stirred up some economic activity, but I don't think it can be sold on the environmental aspects.

There will be lots of economic news this week, but no Treasury auctions. The Treasury will announce its slate for the following week, which will include 5-, 10-, and 30-year bond offerings. This week will see both the manufacturing (Tuesday) and non-manufacturing (Thursday) ISM surveys. It's going to be interesting to see what the clunker program did for the annual rate of car sales to be announced Tuesday.

The big numbers for the week come Friday. Last Friday of the summer? I think we all might resent having to be around for the payroll numbers. The focus will also be on the average hourly pay and the average work week, both of which should show increases. But I might not be around to comment on them!