- Personal income declined by 2.0% month-on-month in May, better than the median consensus estimate for a fall of 2.5%. Another pullback in stimulus payments accounted for the deterioration. Wages and salaries increased by solid 0.8% and proprietors’ income rose a robust 2.8%, despite the end of the second round of the Paycheck Protection Program.
- Removing inflation and taxes, real disposable income declined by 2.8% month-on-month.
- Personal spending was flat (+0.0%) month-on-month in May, below the consensus call for 0.4%.
- Spending on services rose by 0.7%, slowing slightly from the 1.1% gain of the previous month. As in April, gains were primarily led by recreation services, food services and accommodation, as well as housing and utilities.
- Offsetting gains in services, goods spending declined by 1.3%, but from upwardly revised 0.5% growth in April (originally reported as a 0.6% decline). Durables dropped by 2.8% in May, while non-durables declined by 0.4%.
- With the pullback in income, the personal saving rate edged down from 14.5% in April to 12.4%. The rate remains historically high, roughly five percentage points above its pre-pandemic level.
- The overall PCE price deflator rose by 0.4% m/m, slightly lower than the consensus estimate of 0.5%. Relative to May 2020, the index was up 3.9%. The Fed’s preferred inflation measure – the core PCE price index – rose by 0.5% m/m and 3.4% year-on-year, close to the consensus expectation for 0.6% m/m and 3.4% y/y, respectively.
Key Implications
- The services sector is getting its mojo back thanks to a broader business reopening and increased confidence of people to get back to normal. The most affected sectors of the economy – transportation, recreation, and food services & accommodations – were the biggest contributors to growth in May. With pent-up demand for pandemic-constrained services unleashing further, we expect consumption to grow at a double digit rate (annualized) in the second quarter of 2021.
- Driven by an expected waning of economic impact payments, the decline in personal income is tempting to skip over. Still, it’s worth noting the steady growth in wages & salaries, whose level is now above its pre-recession trend, paving the way for continued growth once the impact of stimulus payments is more fully in the rear-view mirror .
- Inflation continues to raise eyebrows. Still, the increase in May was expected given base effect and transitory factors associated with a fast reopening of the economy. The Fed’s monetary policy stance has been recalibrated in accordance with recent surprises and a faster pace of economic recovery. Still, its estimate for core inflation in 2022 and 2023 remains just tenth of a percentage point above 2%. Until the Fed has more proof of inflation’s persistence it is unlikely to signal a more aggressive policy stance.
