Disposable Income Falls Despite Reported Economic Strength

Gold slumped about $25 over the weekend. At last check, the spot price was $1,412. Silver, too, got whacked. At $36.55, it remains $2 above where it was only a month ago.

As today is options expiration on the Chicago Mercantile Exchange, we’re sure traders are covering bets and taking profits.

But we detected another sell signal for the yellow metal… and it’s a specious one, at best.

“Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action,” Fed Chair Ben Bernanke wrote in a Washington Post Op-Ed following the announcement of QE2 last November.

“Higher stock prices will boost consumer wealth and help increase confidence,” he continued, “which can also spur spending.”

If Joe Wage Earner sees a bigger 401(k) balance, the theory goes he’ll go out to Home Depot and redo the kitchen.

Indeed, with the S&P above 1,320 this morning, the “wealth effect” does seem to be at play once again.

Consumer spending rose 0.7% last month, the largest increase since October 2010. Add to that the fact that most Americans got their Social Security withholding slashed by one-third starting the first of the year, thanks to the stimulus rushed through Congress at the end of last year…and the Fed governors want you to know it.

Friday afternoon, Philadelphia Fed chief Charles Plosser hinted at monetary tightening in the “not-too-distant future.”

“The economy has gained significant strength and momentum since last summer and seems to be on a much firmer foundation going forward,” he said.

On Saturday, St. Louis Fed chief James Bullard, reading from the same playbook, went a step further. He let it drop that QE2 might be wound down before its scheduled June 30 end date because “the economy is looking pretty good.”

The dollar index has even popped, firming to 76.4, a full point higher than it stood at this time a week ago, when it touched a 15-month low.

Unfortunately, disposable income, with “inflation” factored in, fell 0.1% last month, according to the Commerce Department. It’s the first drop since September.

Consumer prices for gas and food rose in February at their fastest clip since July 2008.

Addison Wiggin
for The Daily Reckoning