US Personal Consumer Expenditure Rises, Personal Income Sinks as Fiscal Stimulus Unwinds

Personal consumer expenditure (PCE) rose 0.4% in June compared to expectations of a 0.2% increase and a downwardly revised 0.1% rise in May (originally reported as up 0.3%). The increase occurred despite the 1.3% fall in personal income as a result of the unwinding of the one-time increase in social security payments in May that had helped boost personal incomes by 1.3%. Going into the report, personal income had been expected to drop a more modest 1%. With the one-time hit to income reversing, the savings rate fell back in June to 4.6% from May’s spike to 6.2%. The May savings rate was revised down from a previously reported 6.9%.

The rise in June PCE largely reflected a 1.7% surge in spending on non-durables with consumer spending on services up only 0.1% and on durables down 0.2%. As well, all of the increase in nominal spending reflected higher prices, with PCE on a constant dollar basis down 0.1%. Most of the upward price pressure reflected higher gasoline prices, resulting in constant dollar spending on non-durables dropping 0.4%. Real PCE spending on services was flat and down 0.2% for durables.

The core PCE deflator rose an expected 0.2% in the month. This sent the year-over-year rate down to 1.5% from a downwardly revised 1.6% in May (originally reported as +1.8%).

Today’s release provided the monthly detail of the greater-than-expected 1.2% annualized decline in second-quarter consumer spending as reported in last Friday’s second-quarter GDP report. Although the 0.1% drop on a constant dollar basis in June is disappointing, much of the weakness occurred at the start of the quarter. An even greater improvement in consumer spending is likely in July. A return to positive growth was flagged by the unit auto sales numbers reported yesterday that showed a 15.5% rise to an annualized 11.2 million units from 9.7 million units in June, benefitting largely from the “cash-for-clunkers” rebate program. This recovery in consumer spending is helping to reinforce expectations that overall GDP could return to positive growth in the current quarter, rising 1.3% after the 1% decline in the second quarter.

Although the Fed will likely take encouragement from this improving trend, the pick-up in growth is still not robust enough to send the unemployment rate lower. As well, the strength in the third quarter, to the extent that it largely reflects a response to the rebate program, may be borrowing activity from subsequent quarters. Thus, we continue to expect that the Fed will reiterate the message coming out of the August 12 FOMC meeting that the current very low range for Fed funds of between 0% and 0.25% will be maintained “for an extended period.”