Consumption Spending and the Second Derivative
Rick Vollaro+ | May 4, 2009
My colleague, Carl Noble, recently wrote about the latest GDP numbers, and mentioned that we view them as mostly backward looking at Pinnacle. Last Thursday, the March report on Personal Consumption Expenditures (PCE), which is just geek speak for consumer spending, was released. Consumer spending data always grabs our attention since spending is such an important driver of GDP growth in the U.S. economy, and we believe it has shown to be a good leading indicator for equity markets when tracked on a rate of change basis.
The latest data point on the chart below shows a year-over-year decline in spending of -1.2% through March, which on the surface appears quite unconstructive for the economy and financial markets. But on the bright side, there’s actually been three consecutive months of improvement since the low point of -1.5% in December. The increase or decrease in the rate of change is commonly called the “second derivative,” and many analysts believe that the stock market is responding to the improvement in the rate of change across a variety of different indicators recently, even though most, like consumer spending, remain in decline.
In other words, what we’re experiencing is a “second derivative rally.”