Smith Faculty Opinion Article	April 30, 2007
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

Personal Income up $79.9 Billion in March
Savings Improve, Good News for Stocks

Today, the Commerce Department reported in March personal income increased $79.9 billion or 0.7 percent, disposable personal income increased $65.5 billion or 0.7 percent, and personal consumption expenditures increased $24.4 billion or 0.3 percent.

Consumers continue to lead economic growth, and this should continue. However, spending is moderating a bit as consumers save more. Those savings should find their way into the stock market, and that will be good for stock prices.

The weak 1.3 percent first quarter GDP growth reported last week was primarily caused by the slump in new home construction and the trade deficit. The housing sector is likely bottoming, and GDP growth should be in the range of 2.3 in the second quarter and closer to 3 percent in the second half.

Despite the fragility of the economic expansion, inflation remains disturbingly high. The Federal Reserve should not cut or raise interest rates any time soon.

More warnings about inflation from Fed officials are likely to follow todays report but investors should discount the likelihood of any change in interest rate policy.

Inflation and Federal Reserve Policy

The price index for personal consumption expenditures, including food and energy, was up 0.4 percent in March, and was up 2.4 percent from March 2006.

The Federal Reserve closely watches the price index for personal consumption expenditures, less food and energy. This core price index was flat percent in March, after rising 0.2 and 0.3 percent in January and February. In March, the index was up 2.1 percent from March 2006.

As important to the Federal Reserve, the market-based core inflation index, which excludes food, energy and imputed prices like rent on owner occupied homes, was flat in March, after rising 0.2 and 0.4 percent in January and February. That index has increased 2.0 percent since March 2006.

Inflation remains worrisome. Higher global oil prices will continue to push up the broader measures of U.S. inflation, but the Federal Reserve can do little to dampen these pressures by raising interest rates.

With only moderate growth ahead, the Federal Reserve should stand on the sidelines until at least September. Interest rates should remain steady for the next four months.

Savings and the Stock Market

The savings picture improved. Americans continued to spend more than they earned. In March the savings rate was minus 0.8 percent; however, that was an improvement from minus 1.2 percent February.

After falling through January, prices for existing and new homes rose in February and March. Liquidity is good, and the housing adjustment has been mild.

In the months ahead, housing prices will continue to moderaterising somewhat in markets with stronger jobs growth, falling in cities with retrenching industries and staying flat in many others. Purchasing a larger home than a family needs is no longer a good long-term investment, and Americans should turn more to the stock market to build wealth and prepare for retirement.

Stock prices will continue to outperform the U.S. economy. Most large U.S. companies earn a good deal of their profits abroad. The combination of strong growth in Asia and moderate growth in the United States is good for their bottom line.

A weaker dollar makes U.S. equities a particular bargain for foreign investors. Large U.S. multinationals earning significant shares of their profits in Asia are a great play for Europeans who sit on strong euros and pounds but have few good investment options at home.

Surging corporate profits, steady interest rates, and more robust demand from both domestic individuals and foreign investors should power up U.S. stock prices.

Its not too late to get in on the bull market. 2007 will prove a year to remember. You dont want to celebrate from the sidelines.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.