With 70 percent of US economic activity driven by consumer spending, a nation of optimistic consumers can bode well for the US economy–especially when they’re big spenders. That makes the monthly consumer confidence report one of the most widely watched economy indicators in America.

So far this year, consumer confidence has remained relatively flat, seemingly stuck around 70 for the better part of five months now. Yesterday’s report showed the April reading at 69.2 percent versus a revised 69.5 percent reading in March, causing some consternation among investors.

Source: Bloomberg

The process of arriving at this month’s reading was particularly interesting, as almost every component of the headline consumer confidence index rose.

While the headline reading itself declined slightly, only 37.5 percent of respondents said that jobs were hard to find, a 3.2 percent decline from March. And fewer respondents were concerned about rising inflation, as gas prices dropped slightly in many parts of the country. Most also said that business conditions were improving.

The sticking point this month was income growth. Only 14 percent of respondents reported that they expect to see their incomes rise in the coming months, a sharp 1.5 percent decline from March. That’s a bad augur for everything from car and home sales to clothing and other basic consumer goods.

In the past, consumers compensated for stagnating incomes by borrowing, which helped fuel the credit bubble. Although the US is still in the midst of a deleveraging cycle, consumer debt levels have actually ticked up in recent months. After bottoming out at about $2.4 trillion in September 2010, outstanding consumer credit has since risen to $2.52 trillion.

But there’s a definite ceiling to how much further credit can grow, with home financing difficult to secure for all but the best qualified borrowers. And credit card issuers aren’t nearly as liberal as they once were. As of September of last year, there were 261 million Visa cards in use, a decline of 8 million cards since the same period in 2010. Meanwhile, a rising number of households report having no credit cards at all.

As credit conditions remain tight, consumers will have to rely on growing incomes to finance any significant growth in spending. But as you can see from the graph below, consumer incomes are once again contracting.

Source: Bloomberg

While there are a number of factors affecting income growth, employment is the single most important factor. A weak job market puts no upward pressure on wages, and a surplus of available labor can actually push wages down.

Right now, we’re in an employers’ market, particularly for those areas that only require low-skilled labor. With unemployment still running at 8.2 percent, employers don’t have to offer much in the way of wage incentives to attract numerous applicants for open positions.

Until the labor market tightens, there’s no reason to expect incomes to grow. And until incomes grow, consumer spending will remain anemic and the US economy will continue to limp along.

So for now, investors shouldn’t expect a huge improvement in consumer confidence.

What’s New

Two new exchange-traded products launched last week.

As investors have sought out income and diversification, master limited partnerships (MLP) have become increasingly popular. MLPs offer significantly higher yields than traditional equities–the average yield in the MLP space is currently running around 6 percent–and they also exhibit an extremely low correlation with the S&P 500. These characteristics have attracted a number of fund sponsors to the sector, with 11 funds now dedicated to MLPs.

The newest entrant is Global X MLP ETF (NYSE: MLPA), which tracks a basket of 30 MLPs that transport, refine, discover or produce energy resources such as oil and natural gas. For now, however, all of the fund’s holdings are midstream operators, so the fund is essentially competing with ALPS Alerian MLP ETF (NYSE: AMLP).

While ALPS Alerian MLP ETF has the first-mover advantage, Global X MLP ETF has a serious cost advantage: Its annual expense ratio is just 0.45 percent. By contrast, ALPS Alerian MLP ETF charges a 0.85 percent annual expense ratio.

RBS China Trendpilot ETN (NYSE: TCHI) is a “smart” fund that tracks either US-listed Chinese stocks or three-month Treasury bills depending upon market conditions. The exchange-traded note (ETN) tracks the BNY Mellon China Select ADR Total Return Index during periods when the index trades above its 100-day simple moving average for at least three consecutive trading days on a closing basis. If that rule is violated, the ETN then switches to tracking Treasury bills.

The fund charges a 1.1 percent expense ratio during periods when it tracks Chinese stocks, and charges a 0.5 percent expense ratio when it shifts to Treasuries.

Portfolio Roundup

There was no portfolio-specific news last week.