Will stocks decline further? Answer: Watch the Economy

We continue to focus on economic activity to monitor the outlook for earnings, which ultimately drives stock prices.  Masked by the media yesterday was some good reports on the consumer, which still drives the US economy making up almost 70% of GDP.

• Personal consumption expenditures (PCE) rose 0.4% in August. Additionally, the previous month was revised up to 0.4% from 0.3%. Real PCE also rose 0.4%, the most in three months. At the current sales pace, real PCE is tracking at a 3.5% annual rate in Q3, nearly matching the 3.6% annual growth rate in Q2.
• Spending growth was supported by continued steady gains in personal income, up 0.3% for the month. The previous month was revised up to 0.5% from 0.4%. Most income categories increased, led by a 0.5% gain in rental income.
• Real disposable personal income rose 0.3%, and is up 3.2% on a y/y trend basis. This is above the average annual gain of 2.8% since 1980, indicating improving consumer purchasing power, which is positive for real PCE growth.

This suggests consumer spending has been unaffected so far by the increased financial market volatility and global growth worries, which bodes well for the second half of 2015 real GDP growth.