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CONSUMER SPENDING DROPS IN MAY, POINTING TO WEAKER Q2 GDP By Mark Lieberman, Economist for the Five Star Institute In May, consumer spending fell less than 0.1 percent, or by $4.7 billion, reversing the 0.15 percent increase in April, according to the Bureau of Economic Analysis (BEA). Personal income meanwhile grew $25.4 billion, or 0.18 percent, down from April's 0.22 percent growth. The numbers suggest gross domestic product (GDP) growth for the second quarter could slip from the first quarter's weak 1.9 percent growth rate. Economists surveyed by Bloomberg expected spending in May to be flat compared with April and personal income to increase 0.3 percent. In dollars, income growth in May was less than the $29.4 billion in April while spending fell from a gain of $16.2 billion in April. As a result, personal savings grew $25.5 billion in May compared with an increase of $5.7 billion the month before. Disposable personal income—essentially after-tax income—rose $18.5 billion in May. Personal consumption, which represents 70.7 percent of the nation's GDP, for the first two months of the second quarter was up just 0.5 percent from the first quarter; personal consumption grew 1.25 percent from the fourth quarter of 2011 to the first quarter of 2012. Personal savings as a percentage of disposable (after tax) income edged up to 3.9 percent in May from 3.7 percent in April; it also was 3.7 percent in March. With continuing low interest rates, personal interest payments (non-mortgage interest) dropped to $164.1 billion in May, down from $166.8 billion in April. 36 Wages and salaries rose a scant $1.4 billion in May after increasing $5.7 billion in April. Following congressionally mandated reductions, unemployment insurance payments fell $6 billion in May after dropping $2.5 billion in April. May marked the fifth straight month unemployment insurance fell. Wage and salary growth accounted for just 5.5 percent of the growth income in May, down from 19.3 percent in April. Overall, wages and salaries represented 51.25 percent of personal income for the month. The drop in spending came primarily in the purchase of goods, down $26.2 billion from April, and most of that decline—$21.6 billion—came from a fall-off in spending on nondurable items. Spending on durables fell $4.6 billion. Spending on services rose $21.5 billion in May after increasing $25.9 billion in April. The May decrease in spending on goods was the third consecutive monthly drop. The Personal Consumption Expenditure (PCE) Price Index—often considered the Federal Reserve's favored measure of inflation—fell 0.2 percent in May and is now 1.5 percent above its year-ago level. In April, the index was flat and the year-over-year increase was 1.9 percent. Meanwhile, the Core PCE Index—excluding food and energy—rose 0.1 percent in May and is up 1.8 percent in the last year. TRADE GROUP CALLS FOR CFPB OFFICIAL TO RESIGN AFTER REMARKS Sparking indignation in the mortgage broker community, Raj Date, deputy director of the Consumer Financial Protection Bureau (CFPB), laid the bulk of the blame for the housing crisis on brokers during a speaking engagement in June. His statements led at least one industry trade group to call for his resignation. "After all, if you think back to the most problematic vintages of mortgages during the bubble—most of those problematic mortgages were originated not by supervised banks but by mortgage brokers and finance companies," Date said before a group of banking professionals at an American Bankers Association conference in Florida. Marc Savitt, president of the National Association of Independent Housing Professionals, called Date's comments "outrageous." Date, who has a banking background, came to his position at the CFPB "with a preconceived notion about mortgage brokers," Savitt said. It is this "preconceived notion" that Savitt said "shows me that that's the wrong guy for the job" and prompted his organization to call for Date's resignation. Not only has Date "energized and infuriated an entire industry," Savitt said, but Date's claims are simply "not true," according to the trade group president. Date says incentives were misaligned and led to the mortgage bubble. "If a borrower could qualify for a loan at, say, 6 percent, a broker might juice that rate from 6 percent up to 8 percent," he said. The CFPB has been considering mandating a change in loan officer compensation, shifting it from a percentage model to a flat fee. Savitt believes this "is a done deal" already, and it will just be a matter of time before the CFPB implements the change. He cited independent studies from Harvard and Georgetown University that found brokers have traditionally helped borrowers receive lower interest rates. Either way, Savitt says, "The banks approved these loans, not the brokers." While Date speaks of "transparency, fairness, and proper financial incentives," Savitt believes his bias makes him unfit for his role.

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