Euro/U.S. Dollar Could Decline To 1.26

Despite expectations that following several months of subpar income growth offset by rampaging spending and thus a plunging savings rate, March incomes would rise by 0.4%, while spending would be flat, this did not happen, and instead both spending and incomes rose by the same amount, or 0.2% in the past month. Worse, when adjusting for inflation, real disposable income rose just 1.1% compared to last March, and just barely above the 0% breakeven. On the other side, real spending was up 2.2% Y/Y just barely above the 2% recessionary threshold.

Household wealth in the U.S. climbed in the fourth quarter to the highest level in five years, propelled by a gain in home prices that is helping repair family finances. Net worth for households and non-profit groups increased by US$1.17 trillion from October through December, or 1.8% from the previous three months, to US$66.1 trillion, the Federal Reserve said Thursday from Washington in its flow of funds report. It was the highest since the fourth quarter of 2007.

It has long been our underlying thesis that the huge amount of household debt accumulated during the housing boom would inhibit consumer spending and economic growth for some time to come, and this is what has been happening over the last few years.  The errors recently found in the famous Rogoff-Reinhart (RR) book do not change this view.

The economy in the U.S. grew at a faster pace in the first quarter, reflecting the biggest increase in consumer spending in two years as households overcame a drop in incomes by putting less money in the bank.

It’s been a month of high drama on the economic policy front as leaders in Washington grappled with the fiscal cliff. But out in the real world, not many people seemed to care as the economy did just fine. Non-farm employment advanced 155,000, or 0.1%, in December from November, the federal government reported today.