Personal income growth rose 0.4% in July, a small positive surprise relative to consensus (+0.3%), and a welcome result following a flat print in June. Strong growth in wages and salaries (+0.5%), for the second consecutive month, helped boost top-line income. After removing taxes and price effects, real disposable personal income rose a more modest 0.2% on the month.
Spending rose 0.3%, a bit weaker than consensus expectation of a 0.4% advance, but atop of an upward revision to the June number (+0.2% vs. +0.1%). In real terms, personal spending rose 0.2%, but again came atop of upward revision (+0.2% to 0.0%).
After two months of negative or flat growth, consumer prices in July rose 0.1% month-on-month, but unchanged from June at 1.4% on a year-on-year basis. Core prices (excluding food & energy) rose 0.1% month-on-month, but year-on-year core PCE inflation fell back slightly to 1.4% from 1.5% in June.
Although both nominal disposable income and spending growth rose at the same pace in July, the saving rate ticked down slightly to 3.5% from 3.6% in June.
Key Implications
July’s personal income and outlay report was broadly positive on the outlook for the U.S. economy. Disposable income growth bounced back, and real spending expanded at a 2.4% annualized pace. Altogether, this suggests that real consumer spending is set to expand at an above 3.0% annualized pace in the third quarter, contributing strongly to our third quarter growth forecast of about 3.0%.
The most anticipated indicator from today’s report is the core PCE deflator print which yet again failed to register a material uptick from its recent 0.1 month-on-month trend pace. As the Fed’s preferred inflation gauge, changes to the core PCE deflator are being watched closely with the Fed communicating that it’s somewhat troubled by the lack of price pressures despite wage and job growth and estimates of falling economic slack. It appears that inflation is taking longer to respond to economic growth and labor market slack than in past cycles, but overall we continue to believe that price pressures will eventually pick-up as the economic cycle continues to mature.
