- Personal income growth weakened in July slowing from 0.5% m/m in June to 0.1% in July, printing below market expectations of 0.3%. Stripping out price movements, personal income contracted by 0.1% in July. This was the first contraction in real income since September 2018.
- Conversely, spending surged. In nominal terms consumption expanded by 0.6% and on a real basis growth came in at 0.4%, topping market expectations by 0.1ppt in both cases.
- On the prices side, the personal consumption price deflator increased by 0.2% m/m and 1.4% y/y, slightly firmer than the June readings (0.1% m/m; 1.3% y/y). However, excluding food and energy, price inflation was largely unchanged from June at 0.2% m/m and 1.6% y/y. Goods continued to be in deflation territory at -0.5% y/y, while services price inflation was steady at 2.2% y/y.
Key Implications
- Despite moderations in other areas of the economy, consumer spending keeps on surprising with its strength. The American consumer remains confident and is supported by a strong labor market. Both factors should continue to support healthy consumption growth through the remainder of the quarter.
- However, the weakness in personal income growth is something to watch out for. Slowing manufacturing activity, weaker investment and softening global growth is translating to less hours worked which is likely pulling down income growth. If this continues it will could weaken consumption, thereby destabilizing the backbone of the U.S. expansion.
- The Fed is well aware of this fact and will probably move to provide further monetary stimulus in September. Moreover, given that the headwinds — weakening manufacturing activity, elevated trade tensions, and softening global growth — will not dissipate so quickly, further monetary support will likely be required in the months ahead.
