Income/Spending/Inflation data generally as expected

Personal Income growth was slightly weaker than expected at +.4% MoM (consensus +.5%), but spending was right on consensus at a very modest gain of +.1% MoM, down from an increase in personal spending of +.6% MoM in May.

June's +.1% MoM gain in spending was the smallest increase in nine months. This is important because consumer spending currently accounts for approx 70% of GDP, though this percentage, and the consumer's importance to the economy, may slip if domestic consumption declines and exports increase. Income growing four times faster than spending should help stabilize consumer spending,, even as higher gasoline prices reduce other discretionary spending. The slump in housing, and now equities, also puts consumers under greater strain. The impact of these factors can be seen in the slowdown in consumer spending which increased at the slowest pace last quarter in more than a year, and only rose at one-third the pace of the first quarter's growth. Auto sales were the lowest in two years last month. Durable goods spending fell -1.6% MoM while spending on services rose +.5% MoM, basically at trend.

Personal income is growing at a fairly decent pace when annualized, at just under 5%. Personal income when adjusted for taxes, otherwise known as disposable income, rose +.4% MoM for the second month in a row. Inflation-adjusted disposable income rose +.3% MoM.

Personal consumption expenditure inflation figures were unexpectedly revised higher in May, causing the June figures, which came in at expectations as unchanged from the originally released May figures, to show a decline in inflation. The PCE deflator for May was +2.3% YoY, and the core PCE was +1.9% YoY. Core PCE grew +.1% MoM (consensus +.2%). Core PCE is considered to be the Fed's preferred inflation measure. They are believed to desire inflation to range between 1-2%, which today's figure does. The three month annualized rate has fallen to +1.6%.

Revisions to GDP data last week improved the savings data back into positive territory from negative territory. Today's data for June shows the savings rate rising from +.4% last month to +.6% in June, as income grew faster than spending.

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Employment Cost Index for the the 2nd quarter grew +.9% QoQ, as expected, and a slight increase from the +.8% pace of the first quarter. Unexpectedly, benefits costs rose the most in two years as companies improved benefits to retain employees. On an annual basis, the ECI fell from 3.5% YoY in the first quarter to +3.3% YoY in the second quarter. Wages and salaries have risen +3.4% YoY. Benefits have also risen +3.4% YoY (up from +3.1% in the first quarter), but they fell -.3% QoQ in the first quarter before rising +1.1% QoQ in the second quarter.

The ECI includes wages, benefits, and employer contributions to Social Security and Medicare, but not bonuses and options. Eliminating the later enables this index to show more modest labor cost gains than other indicators. Benefits costs include severance pay, health insurance, and paid vacations.