Chapel Hill, NC/May 12, 2010:  According to the monthly Deloitte Consumer Spending Index, consumers are spending again.  And most economists agree that is a positive indicator for our economy.

In fact, the Spending Index rose for the second consecutive month in April and remains at its highest level in six years.

The purpose of the Index is to estimate consumer cash flow, which when on the rise, is assumed to be an indicator of future consumer spending.  Spending means that demand for goods and services goes up, and that eventually means that jobs are created to fulfill the demand, which in turn fuels more demand.

But if you were an economist, like Carl Steidtmann, chief economist with Deloitte Research, a subsidiary of Deloitte Services LP, and author of the monthly Index, you would have a fairly convoluted explanation for what the data all means. In fact, Steidmann says, "In April, the Index continued to benefit from an improved employment picture, and for the first time since the spring of 2007, the housing market was a positive contributor to the Index.  While real wages have been deteriorating due partly to inflation, any negative effect is being offset by strength in other components of the Index. Tax rates are at historically low levels; however, should proposed tax increases materialize in the months ahead, they may begin to drag on the Index."

Here's what is really going on. The Index is comprised of four components:

1. Tax burden;
2. Initial unemployment claims;
3. Real wages, and
4. Real home prices

All this talk about tax cuts, and all those worries about rising taxes. Everyone says they are feeling the pinch, and nobody wants to pay any more.  But where we really stand is that consumers' tax burden declined sharply through most of the recession and is now holding steady at a historically low level.  The Federal Government is acutely aware that now, with the economy seemingly at the beginning of recovery, now is not the time to raise taxes. State governments, however, are probably not so concerned about what is best for the Nation.  Still, at the macro level taxes are not holding back consumers.

In our economy, at least up to this point in the year, employment has risen for three of the last five months, and with companies now hiring, new unemployment claims are likely to continue shrinking.

Real home prices actually rose in April, and they were also up the month before. Certainly the tax credits helped grow demand, but those tax incentive are coming to an end.  Not withstanding, the increase in demand means that real home prices rose for the first time since Spring 2007.  This is a positive trend, but only a few economists are willing to say the housing market has completely recovered.  Still, one more month of positive housing prices and I think everyone will be on board.

Here's one of the reasons some economists are still hedging about our recovery: real hourly earnings declined for the third consecutive month. Nominal wages (not adjusted for inflation) have been flat in recent months. Why? There is a little bit of inflation that is showing up, likely caused by dwindling supplies of goods. Once manufacturing employment shows steady, monthly improvement, then inflation pressures will ease and real hourly earning will improve.