- Personal income rose by 0.4% month-on-month in July, beating consensus expectations which called for a 0.2% decline. Income supplement programs provided in the CARES Act continued to support personal income last month. Expanded unemployment insurance boosted income by $1.1 trillion while one-time checks contributed another $32.8 billion in annualized terms.
- Spending rose for the third straight month in July, increasing by 1.9%, also exceeding expectations (+1.5%). Both goods and services saw steady gains, growing by 2.0% and 1.9%, respectfully. Within goods, spending on new motor vehicles drove the increase, while health care, food services and accommodation boosted spending in the services sector.
- The personal saving rate remained elevated at 17.8%, a tad lower than where it was in June (19.2%).
- The PCE deflator advanced by 0.3% m/m in July. In year-over-year terms, PCE inflation was 1.0%, up from 0.9% in June. The overall PCE deflator was held down by declines in food prices (-0.9% m/m), although energy prices provided a lift (+2.5%). Stripping out food and energy, the core PCE deflator increased by 0.4% on the month (1.3% y/y).
Key Implications
- This was a solid report. Spending continued its upward trend and is now only 5% below where it was in February. Much of the rebound was due to spending on relatively expensive durable goods (i.e. recreational goods and vehicles). As demand for these products is satiated, spending growth will likely slow, especially as certain areas of the services sector continue to be hampered by pandemic-related restrictions and uncertainty.
- The consumption recovery thus far would not have been possible without solid income gains. Specifically, the income supports provided in the CARES Act have enabled Americans to spend over these past three months, despite the heavily injured labor market. However, with income now set to fall in August due to the expiry of the $600/week unemployment top-up, consumers will think more carefully on spending decisions in coming months. What is more, there is a distributional consequence of the pandemic that has helped to push up the aggregate saving rate. Higher income individuals have seen less of a disruption to income, but have cut spending due to pandemic-related uncertainty and continued limitations on their ability to spend as they did prior. The high saving rate may therefore not prevent a drop in spending among the unemployed who will be constrained by the reduction in income supports.
- Congress will need to provide more income support to avoid a setback in the economic recovery. However, with Democrats and Republicans still deadlocked, a stimulus bill doesn’t appear imminent. Dark clouds are forming on the horizon.
