US Personal Income and Spending Hold Steady in June

Personal consumer expenditure (PCE) in June was unchanged from the previous month following the 0.1% increase seen in May (revised down from 0.2% previously). Market expectations going into the report were for a 0.1% increase. The nominal reading was held back by price declines in the month as the volume of consumer spending increased by 0.1%.

Personal disposable income was also unchanged in the month, following strong gains of 0.3% in May, 0.4% in April and 0.4% in March; however, the personal savings rate still edged up to 6.4% from 6.3% in May.

The overall flat reading in nominal PCE was the result of gains in durables (0.1%) and services (0.1%) being offset by a  drop in spending on non-durables (-0.4%). Most of the weakness in the non-durables reflected price declines for gasoline because the volume of spending on non-durables actually rose by 0.1%. Gains were also seen in volumes of the durables (0.4%) and services (0.1%) components.

On the inflation front, the flat reading for the core PCE deflator, on a chain-weighted basis, was weaker than the 0.2% increase expected going into the report. Nevertheless, the annual rate of increase edged higher to 1.4% up from the 1.3% recorded in May. The overall PCE price measure was down -0.1% in the month and up 1.4% for the year, although this represents a markedly slower pace than the 2.1% annual increase seen in May.

Today's report provides the monthly detail on the 1.6% annualized gain in consumer spending that was reported last Friday, July 30, in the second-quarter GDP report.  Today’s increase in PCE on a volume basis in June sets the stage for consumer spending to continue to increase in the third quarter. 

The sustained growth points to the economy continuing to recover from the recent recession; however, the pace of growth remains fairly muted, and our forecast assumes that employment gains will not be sufficient to put significant downward pressure on the unemployment rate in the near term.

With today’s report continuing to suggest that inflation remains subdued, we do not expect an increase in the Fed funds target from its current 0.00% to 0.25% range until well in to next year.