U.S. Personal Spending Boosted by Stimulus-Induced Jump in Incomes

Personal consumer expenditure (PCE) rose an expected 0.3% in May following unchanged spending in April (previously reported as down 0.1%). Spending was supported by the 1.4% jump in personal income with a one-time increase in social security payments, an element of the Obama fiscal stimulus package, which provided a much greater-than-expected boost. Going into the report, personal income was expected to rise by only 0.3%. Excluding this fiscal stimulus, growth in personal disposable income would have increased only 0.2%. However, with the one-time hit to income, the savings rate in May jumped to 6.9% from 5.6% in April.

The 0.3% rise in PCE mainly reflected a 0.8% gain in the consumption of durables, reflecting the earlier-reported increase in motor vehicle sales. Consumption of non-durables rose 0.5%, while spending on services was unchanged. Eliminating the impact of price changes, real consumer spending rose 0.2% in May following a 0.1% drop in April.

The core PCE deflator came in as , rising 0.1% in the month and 1.8% over the year. This represented some easing in price pressures relative to gains in April of 0.3% and 1.9% for the month and year, respectively.

The 0.2% gain and 0.1% drop in PCE on a constant dollar basis in May and April, respectively, point to the consumer spending component of GDP likely being essentially flat in the second quarter (-0.2% at an annual rate). More sizeable declines in investment spending in the quarter are expected to send the overall second-quarter GDP growth rate down significantly, although by less than one-half of the 5.5% drop recorded in the first quarter.

Although some encouragement can be taken from indications of an easing in the pace of GDP decline, falling output will keep the Fed wary about the near-term outlook and contribute to monetary conditions remaining accommodative. This was likely a factor in the reiteration by the Fed at the conclusion of Wednesday’s FOMC meeting that the current low range for Fed funds of 0% to 0.25% will be maintained “for an extended period.”

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.