Core PCE falls to +1.9% YoY

Personal spending continues to rise fast than personal income, but both grew more slowly than expected in May. Inflation indicators came in right at expectations with core PCE falling to 1.9% YoY.

Personal income rose +.4% MoM (consensus +.6%), with last month's figure being revised lower to -.2% MoM from -.1%. Compensation, wages & salaries, and disposable incomes all rose +.4% MoM in May.

Personal spending rose +.5% MoM (consensus +.7%), consistent with the +.5% MoM gain in April. Spending rose only +.1% MoM when adjusted for inflation, a slowdown from the +.2% MoM gain the prior month. Demand for durable goods rebounded in May, rising +.6% MoM after falling -.4% MoM the prior month. Non-durable goods also saw a rebound with demand rising +.2% MoM after declining -.2% in April. Unfortunately the gains in goods were offset by a decline in service demand, which accounts for 60% of the economy. Spending on services fell -.1% MoM in May after rising +.6% in April. Consumer spending accounts for about 70% of GDP, and it has been hurt recently by rising gasoline prices and higher interest rates. The slowdown in consumer consumption will have a negative impact on GDP growth.

The savings rate continues to degenerate, to a negative -1.4%, as consumers continue to spend more than they earn to maintain their standard of living. The savings rate was only -.4% in March.

Core PCE, considered the Fed's preferred inflation measure, rose at the slowest pace in over three years, since March 2004. The 1.9% YoY pace of core PCE growth brings the measure back into the perceived Fed comfort range of 1-2%. On a monthly basis, core PCE, which excludes food and energy, rose a trend like +.1% MoM. Headline inflation though rose to +2.3% YoY from +2.2% the prior month. Yesterday the Fed indicated that they will need to see inflation stabilizing at lower levels before they declare success in containing inflation.

Ten year Treasury yields have declined following this report, falling almost 3bps.