July Personal Income, Spending, and Inflation

Personal income plunged more than expected in July, falling -.7% MoM (consensus -.2%, prior +.1%). This was the first drop in incomes since mid-2005. In contrast spending rose +.2% MoM, as expected, but at a slower pace than the +.6% rise in June. All three inflation indicators rose as expected, with headline PCE inflation rising +4.5% YoY, to the highest level since the early 90s. This was a rapid rise from the 4% pace observed in June, which was revised down from the 4.1% rate previously announced. Core PCE, which looks at the Fed’s preferred personal consumption expenditures after food and energy, rose +.3% MoM, the same pace as June, and rose to +2.4% YoY from 2.3% the prior month. This was the largest annual increase in core PCE since early 2007. Over the past year, personal income has risen +4.2% while personal spending has grown by an even larger +5.3%. The savings rate in July was 1.2%, down from 2.5% last month and 4.9% in May, but still up from the +.2% in March and April before the stimulus checks began. Within personal income, compensation rose +.3% MoM, as did wages and salaries. But disposable income, which is after taxes, fell -1.1% MoM, reflecting the ending of the tax rebate check stimulus. Excluding stimulus payments, disposable income would have risen +.5% MoM. When income is adjusted for inflation, it fell -1.7% MoM, an improvement on the -2.6% MoM pace of June. When adjusted for inflation, spending fell -.4% MoM, the largest drop in four year. By category, inflation adjusted spending on discretionary durable goods fell -1.6% MoM, while spending on non-durables, such as food and gasoline fell -.9% MoM in inflation adjusted terms. Spending on services were constant. Consumer spending accounts for 2/3rd of GDP. With incomes falling, and the economy slowing, the consumer is not in good shape, which is bad for spending in the next few months. It is estimated that the longest expansion in consumer spending will end this year. There is a chance that real personal spending could fall in the third quarter for the first time since 1991.