Personal income rose 0.6% month-on-month (m/m) in June, one tick above the consensus estimate and matching May’s pace. The gain was led by employee compensation of employees (+0.4% m/m) and proprietors’ income (+1.4% m/m).
However, with inflation running hot – the PCE deflator rose 1.0% m/m in June – real disposable income fell 0.3% m/m.
Nominal personal spending gained momentum in June, rising 1.1% m/m after a smaller 0.3% m/m in May, beating the consensus estimate (+0.9% m/m). However, given high inflation, spending in real terms was up a modest 0.1% m/m, after dropping 0.3% in May.
- Real goods spending rose 0.1% m/m in June, as outlays on durable goods (+0.9% m/m) gained some ground after a steep decline in May. Real spending on nondurables continued to decline (-0.4% m/m).
- Somewhat disappointing, services spending grew by only 0.1% m/m in real terms. Looking at spending that has been sensitive to swings in the pandemic, food services (+0.3% m/m) and accommodation (+3.2% m/m) made gains, but spending on transportation services (-1.1% m/m) and recreation (-0.4% m/m) were disappointing.
The Fed’s preferred measure of inflation, the core PCE deflator, which strips out food and energy prices, accelerated in June, rising 0.6% m/m. That was slightly above consensus, and took the year-ago measure to 4.8%. That is somewhat below the 5%+ pace earlier in 2022, but well above the Fed’s comfort zone.
The personal saving rate continued to decline, reaching 5.1% in June. Its pre-pandemic average was 7.5%, which implies that consumers are continuing to draw down their cushion of “excess” savings built up during the pandemic’s restrictions.
Key Implications
While it is positive that real consumer spending gained ground after falling in May, it is hard to view this report as anything other than disappointing. June’s modest gain sets up the third quarter for another soft showing in consumer spending. We are currently tracking around a 1% annualized gain, below our June forecast expectation for 2%.
The biggest disappointment has come in high-contact services spending, which we had been counting on the release of pent up demand in these areas to drive decent consumer spending growth. After a couple of months of weakness in these areas, it seems consumers may be being forced to economize on these discretionary measures as inflation bites into real incomes.
