US Daily Economic Update

US Personal Income Report Sends Mixed Signals

Personal income and spending rose 0.6% and 0.4%, respectively, in June. Most importantly, the core personal consumption expenditures (PCE) deflator rose by 0.2%; the core PCE deflator rose 2.4% on a year-over-year basis. Monday's report led to an initial selling of Treasuries and placed a bid under the dollar – a trend likely to remain in place for the balance of the day.

On an inflation-adjusted basis, personal spending rose a 0.2% following a revised upward gain of 0.2% in May. Consumer spending did not come to screeching halt at the end of the second quarter, alleviating fears that growth in domestic spending would soften in the quarters ahead.

Personal income growth remains high due mostly to strong wage growth and a tight labour market. On the inflation side, the report confirms that inflation remains above the Fed’s comfort zone and continued to rise on a year-over-year basis in June (2.4%).

If the Fed was not too concerned about inflation before this report, its attention will rise given the report’s consistency with trend-like consumption growth in a rising inflation environment.

We continue to believe that the Fed will remain on the sidelines at the August and September FOMC meetings and then raise the Fed funds rate by 25 basis points at its October meeting to combat mounting inflationary expectations alongside rising core CPI and PCE inflation.

US Manufacturing Activity off to Strong Third-Quarter Start

The July ISM index came in at 54.7, better than expected with the consensus forecast calling for 53.5.  Rates and the USD both went up marginally on this report

The increase in the July ISM index indicates that manufacturing activity continues to expand and is off to a good start in the third quarter. The employment index increased to 50.7 from 48.7. The more forward-looking components of the report – the backlog of orders and new orders – slowed down but remained in expansionary territory above 50. The prices index rose to 78.5 from 76.5 in June.  This indicates that manufacturers continue to pay high prices. 

The growth in the PMI index could potentially be a little worrisome for the Fed. According to the Institute for Supply Management, if the PMI for July were annualized, it would correspond to a 4.4% annual increase in real GDP. 

Also worrisome was the increase in the prices index, which could lead to higher inflation for the consumer down the road if the increases faced by manufacturers are passed through.

US Non-Residential Construction Behind Rise in Construction Spending

Construction spending rose by 0.3% in June, above the market consensus calling for a 0.1% increase. Non-residential construction at $303.1 billion ( 2.7% above May’s revised estimate of $295.2 billion) was responsible for the growth.  Residential construction was at a seasonally adjusted annual rate of $641.6 billion, 1% below the revised May estimate of $648.4 billion. 

This report provides further evidence that U.S. housing market activity continues to slow, which will be of little surprise to the Fed.