Personal income grew by 1.1% m/m in July, well above the consensus estimate for 0.2% growth. The expanded child tax credit helped lift government transfer receipts (+2.9% m/m) – the highest contributor to growth this month. Compensation of employees (+0.9%) was also robust, as hiring gained momentum in July.
Excluding price changes and taxes, real personal disposable income increased by 0.7% m/m.
Nominal spending rose by 0.3% m/m, a tick lower than 0.4% anticipated by the consensus, but on the back of an upwardly revised June reading of 1.1% (from 1.0% originally). Households continue to rebalance their consumption basket with spending on services improving by 1.0% m/m and spending on goods falling by 1.1% m/m (with a reading of -2.3% m/m for durables and -0.4% for non-durables).
Removing price increases, real spending edged lower by 0.1% m/m, with real services gaining 0.6%, but goods falling 1.6% m/m. Real spending on services remains 2.7% below its pre-pandemic level (while in nominal terms it recovered fully in June).
Prices continued to grow at an above-trend rate in July. The headline PCE deflator rose by 0.4% m/m and 4.2% year-on-year (y/y), while the core PCE deflator – the key metric on the Fed’s dashboard – rose 0.3% m/m and held steady at 3.6% y/y.
The personal saving rate rose to 9.6%, remaining well above its pre-pandemic average of 7.5%. Over $2.5 trillion in excess saving, accumulated over the course of the pandemic should push this rate lower as the economy recovers.
Key Implications
The decline in good spending was already telegraphed by this month’s downswing in retail sales, leaving the speed of growth in services consumption the only source of uncertainty. Despite an uptick in COVID cases at the end of the month, services spending remained healthy in July, starting off the third quarter in line with our estimates. Still, the strength in spending will remain the focal point of the coming months as the rise in cases and hospitalizations continue to threaten the most vulnerable sector of the economy.
Strict restrictions, comparable to those imposed in the winter, are unlikely. Still, the spread of the Delta variant could still damage the economy: consumers may grow reluctant to spend on still-depressed high-touch services, while workers on the sidelines may feel less compelled to seek employment. In the meantime, the expiration of the pandemic UI benefits on September 4th may add to the injury: according to a recent study, unemployed workers in states that ended emergency UI reduced their weekly spending by 20%.
All eyes now turn to the symposium at Jackson Hole. In his keynote address at 10am, Fed Chair Powell is expected to provide clarity on the Fed’s strategy for tapering. Elevated inflation and solid economic momentum make the case for withdrawing emergency-level monetary measures, but uncertainty on the economic outlook may yet stay the Fed’s hand.
