- Personal income rose by 0.4% month-on-month in August, following a soft 0.1% gain in July. Disposable income also saw a healthy increase, rising by 0.5% in August. Real disposable income growth was only slightly slower at 0.4% last month.
- Despite the rise in income, spending growth weakened to 0.1% m/m both in real and nominal terms and was below consensus expectations (0.2%). This was the lowest reading since February this year. There were also downward revisions to spending from May through July.
- On the prices side, the overall PCE index was unchanged on a month-on-month basis, while rising at 1.4% on an year-over-year basis. Stripping out food and energy prices, PCE ticked up to 1.8% year-on-year in August from 1.7% in July.
Key Implications
- Following strong gains through most of the year, spending finally let off some steam in August. It is too early to say if weakness in other areas of the economy is creeping into consumption. It is after all one data point, and spending growth was expected to cool off to some degree in the second half of the year. Moreover, even with this release, we are still tracking a solid increase in PCE in the 2.5%-3.0% range in the third quarter.
- Indeed, the rise in personal income is a good signal that consumption growth will remain healthy through the remainder of the year.
- On the whole, this data release will do little to shift views at the Federal Reserve. The hawks on the Board will see this release as showing sustained economic health, while the doves may see weaker-than-expected rise in consumption growth as a reason for more stimulus. We expect to see one more rate cut from the Fed by the end of the year.
