Personal income edged lower by 0.1% month-over-month (m/m) in April, coming in below market expectations for a 0.4% gain. After adjusting for inflation, taxes and transfers, real personal disposable income declined by 0.5% m/m.
Consumer spending rose 0.5% m/m in nominal terms – in line with market expectations. Consumers continued to spend more on gas amid high prices at the pump, which rose 5.7% last month, on top of a 19.0% increase seen in March due to higher prices.
After adjusting for inflation, spending growth remained tepid at 0.1%. Consumers spent less on goods in real terms (-0.1% m/m), cutting back on durables, such as motor vehicles and parts (-1.1% m/m) and recreational goods and vehicles (-0.5%). Spending was also weaker on clothing (-0.9%). Services spending fared better, rising 0.2% m/m. Recreational services rebounded by 1.1% and spending on food services and accommodation edged up by 0.2% after a flat reading the prior month. Spending on housing and utilities was flat, while outlays on transportation services edged lower 0.2%.
The personal saving rate continued to edge lower, dropping to 2.6%, from the downwardly revised 3.2% in the prior month and the lowest rate since June 2022.
Inflationary pressures eased slightly relative to the previous month, even as inflation accelerated on a year-over-year basis. Core PCE—the Fed’s preferred inflation gauge—rose 0.2% m/m, slightly slower relative to 0.3%-0.4% monthly increases seen over the last four months. However, the twelve month change accelerated to 3.3%, slightly up from 3.2% last month.
Key Implications
The impact of higher gas prices was once again front and center in this report. Spending increased in nominal terms, but gains were modest after adjusting for inflation, with the squeeze of higher gas prices—which have remained above $4 per gallon since the end of March—weighing on consumption. Even with the boost from higher tax refunds this year, disposable income is not keeping pace with spending, prompting households to tap into their savings, indicated by a notable decline in savings rate.
Rising equity prices, a stable labor market, and larger tax refunds have provided support to the consumer through the early days of the energy shock. However, high gas prices and slower wage growth among low-income workers will reinforce the K-shaped dynamics in consumer spending. Low- and middle-income households—who allocate a larger share of their budgets to food and fuel—are likely to scale back discretionary purchases. We are already seeing some signs of this in declining volumes of gas sales, as well as softer demand for durable goods and clothing. Overall, we expect U.S. consumer spending growth to run closer to 2% this year, down from our “pre-war” forecast of 2.5%.
