Why Less Consumer Spending May Make Investors Happy

Americans both earned less and spent less last month, with spending and income estimates coming below consensus.

Giving up that precious plastic may help control your spending, but there are disadvantages

The new data temper positive economic news from earlier this week, when the Conference Board reported a strong boost in consumer confidence.

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Americans both earned less and spent less last month, with spending and income estimates coming below consensus. 

The Commerce Department reported Friday that Americans' income fell slightly, by less than 0.1 percent, and that their income after taxes fell by 0.1 percent in April. And with lower income, consumers also kept their wallets closed, with spending dropping 0.2 percent from March to April.

The new data temper positive economic news from earlier this week, when the Conference Board reported a strong boost in consumer confidence.

Still, lower spending may not come as bad news to everyone. With the Fed stimulating the economy in response to consistently shaky economic data, the stock market in some ways benefits from bad news.

[READ: Government Revises GDP Estimate Slightly Downward]

"You might be at the point now where bad news is good news," says John Canally, economist at LPL Financial. He says investors may now be thinking that "the data's bad, so therefore the Fed's not going to taper" off of its $85 billion monthly bond buys. The purchases are the third round of quantitative easing, or "QE3" for short.

When the Fed buys bonds, it sends yields on those investments downward, sending investors to higher yield assets such as stocks. This is one key reason why the stock market has broken records even amid a remarkably slow recovery.

After the unexpectedly weak March jobs report, for example, some investment advisers reported that they advised clients to stay in stocks, as the market would continue to be buoyed by accommodative Fed policy.

The market still does rejoice at good news and worry at bad news; this week's strong consumer confidence reading helped send the Dow Jones Industrial Average shooting upward on Wednesday, and the Dow posted a moderate drop of around 60 points after its Friday open.

[ALSO: The (Sort Of) Amazing California Job Recovery]

Over the long run, wages will have to improve in order for the economy to have a sustainable recovery.

"The economy is growing, business profits and balance sheets are strong and stock prices are soaring yet labor payments are being held down," said Joel Naroff, president and chief economist at Naroff Economic Advisors, in a commentary on Friday's numbers. "How anyone expects strong domestic growth without strong consumption is beyond me."

Still, there is plenty of reason why markets will recover strongly from any Friday losses. Buried in today's data is one nugget that should reassure investors that the Fed isn't pulling back on its bond buys anytime soon: Personal consumption expenditures inflation, the Fed's preferred measure of price changes, grew only by 0.7 percent over the last year, with core PCE inflation growing by only 1.1 percent.

The Fed has a target for inflation at around 2 percent. Soft consumer spending data, plus room for more money printing, may mean that the Fed will be more apt to keep the easy money going for a few more months.

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