Personal income rose 0.3% in April, bang on expectations. Adjusted for inflation and removing taxes, real disposable income was up 0.2% in the month.
Personal spending rose by a robust 0.6% in nominal terms in April, ahead of consensus forecast for a 0.4% gain. Spending on non-durable goods led the way rising by 0.9%, followed by spending on services (+0.5%). Meanwhile, spending on durable goods rose modestly (+0.3%). After stripping out inflation, spending advanced by a solid 0.4% in real terms.
Prices rose by 0.2% on the month, lifted by both energy and food prices, which increased by 1.5% and 0.3%, respectively. On a year-over-year basis, headline inflation remained unchanged at 2%, right on the Fed’s target. Core PCE inflation – the Fed’s preferred measure of inflation – also rose by 0.2% (month-on-month), but remained unchanged at 1.8% on a year-over-year basis.
The personal saving rate fell by 0.2 percentage points to 2.8% – the lowest level since December 2017.
Key Implications
Two strong back-to-back prints in consumer spending in March and April reaffirm that U.S. consumers left behind their winter blues and are back in full force. Washington’s tax cuts were also implemented on employee payrolls part way through Q1, so the recent strength in spending likely reflects consumers starting to spend those slightly larger paychecks. As a result, after expanding by just 1% (annualized) in the first quarter of the year, consumer spending is on track to well surpass the 3% mark in Q2. This bodes well for GDP growth, which is also likely to come in north of 3%.
A rebound in spending and inflation was already baked into the FOMC’s thinking, as evident from the latest FOMC minutes. As a result, there’s not much new in this release for the FOMC committee, with a June hike likely a done deal. However, with core inflation still running below 2%, there are few signs that the economy is overheating, which allows the Fed to continue with their gradual pace of rate normalization.
That being said, the risk of trade wars muddies the water on the inflation outlook. If imposed, tariffs will lead to higher prices for American consumers. As such, trade developments will be closely followed by the Federal Reserve in the coming months.
