Personal income rose 0.5% month-on-month (m/m) in May, meeting the consensus estimate. April’s growth was revised up to 0.5% (from the 0.4% m/m reported the month prior). Compensation of employees (+0.5% m/m) and proprietors’ income (+1.5% m/m) were the biggest contributors to income growth.
Removing the effect of price changes and taxes, real personal disposable income was down 0.1% m/m in May, while April’s figure was revised up to 0.3% m/m (from a flat reading released earlier).
Nominal personal spending rose by 0.2% m/m in May, below the consensus estimate (+0.4% m/m). April’s print was revised down to +0.6% m/m vs. +0.9% m/m reported in the preliminary estimate.
- Goods spending was down by 0.7% m/m from downwardly revised growth of 0.2% in April (originally +0.8% m/m). Higher prices of gasoline supported growth in non-durables (+0.7% m/m), while spending on durable goods were down by 3.2% m/m.
- Services spending rose by 0.7% m/m, while the April reading was adjusted down to 0.7% m/m (originally +0.9% m/m). The gains were led by housing, “other” services (including international travel), and health care.
Adjusted for price changes, real spending was down -0.4% m/m – a tenth of a percentage point below expectations. April’s reading was revised down to 0.3% m/m (vs. 0.7% m/m reported earlier).
On the prices side, the PCE deflator increased by 0.6% m/m, surprising markets by +0.1 percentage points (0.7% m/m expected). This translates to a 6.3% gain relative to last year (vs. the 6.4% expected). Stripping out food and energy prices, the core PCE deflator was up 0.3% m/m in May, matching April’s print. In year-over-year terms, core inflation stood at 4.7% last month (vs. 4.8% expected).
The personal saving rate remained below its pre-pandemic average of 7.5% with a reading of 5.4%, indicating that consumers continue to tap into their pool of excess savings. Current estimates suggest that excess savings remain elevated at roughly $2.4 trillion.
Key Implications
Consumer spending lost momentum last month, but it’s not entirely surprising given the strength in May and relentless increases in prices. As was anticipated, services spending continued to make good strides in regaining ground lost during the pandemic, but just not enough to offset the pull-back in goods spending. Accounting for today’s print and last months’ revisions, we now expect real personal expenditures to grow at roughly 1.5% (annualized) in the second quarter, meaningfully slower than we expected in our Quarterly Economic Forecast.
A healthy level of demand destruction is exactly what the Fed is looking for, so today’s release won’t stop it from acting decisively. With its preferred inflation measure – the core PCE deflator – more than two percentage points above its target, the Fed is expected to raise the policy rate by another 75 basis points (bps) at its next meeting in July.
