Personal income rose 0.2% month-on-month (m/m) in July, below the consensus estimate (+0.6% m/m) and slower than June’s upwardly revised pace of +0.7% m/m. The gain was led by employee compensation of employees (+0.8% m/m) but was partially offset by decreases in proprietors’ income (-1.3% m/m), personal current transfer receipts (-0.4% m/m), and rental income (-1.3% m/m).
The headline PCE deflator came in negative for the first time since April 2020, declining by 0.1% m/m in July but was 6.3% higher in year-over-year (y/y) terms. Excluding food and energy, core PCE inflation was up 0.1% m/m and 4.6% y/y – below June’s reading of 4.8% y/y. Core PCE inflation is what the Federal Reserve references to gauge U.S. inflation when setting monetary policy.
Adjusting for inflation and taxes, real disposable income was up 0.3% m/m, reversing June’s decline.
Nominal personal spending lost momentum in July, rising 0.2% m/m after a downwardly revised +0.7% m/m gain in June (from +1.1% m/m reported earlier), and below the consensus estimate (+0.4% m/m). Spending in real terms was up a modest 0.2% m/m, after a flat reading in June (from 0.1% m/m).
- Real goods spending rose 0.2% m/m, with outlays on durable goods (+1.5% m/m) contributing and spending on nondurables (-0.5% m/m) subtracting from the reading.
- Services spending grew by only 0.2% m/m in real terms; housing and utilities and transportation services were the leading contributors.
With inflation eating into consumers spending power, the personal saving rate remained under downward pressure, dropping to 5.0% in July.
Key Implications
This was a good downside surprise, as some deceleration in spending is required to keep inflation under control. Alongside yesterday’s upward revisions to Q2 consumption, July’s gains sets up the third quarter for a solid gain in consumer spending. We are currently tracking around between 1.5 and 2% annualized gain.
Real disposable income growth came in strong in July, but remains flat when looking at the six-month average. In contrast, despite some deceleration, real monthly spending have been growing at +0.1% on average over the same period, which suggests that households continue dipping into their pandemic savings or borrowing more.
Despite a still sizeable nest egg of roughly $2.5 trillion, consumers can’t continue to exceed their income for too long if they want to preserve some financial for the future. That’s why expect that the long-term spending and income trends to continue to converge in the future. Still, there are several wildcards. For example, the recent student debt relief announcement is likely to boost future spending by those who benefit.
