Personal income rose a strong 0.4 percent in July after June’s flat reading. Spending strengthened as well, up 0.3 percent in July with an upward revision to 0.2 percent in June.

Gains in July Were Broad Based

Personal income surged 0.4 percent in July, besting consensus estimates and signaling stronger momentum going into the second half of the year after June’s flat reading cast some doubt. The disappointing print in June largely resulted from a payback for May’s surge in personal income from assets, which overshadowed a strong 0.5 percent gain from wages and salaries in June. Personal income from assets recovered in today’s report, up a solid 0.6 percent in July, while wages and salaries growth came in at 0.5 percent again in July. This has benefitted consumers’ pocketbooks, as disposable income rose 0.3 percent in July.

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Personal spending was also up solidly in July, though the 0.3 percent gain was slightly below consensus estimates of 0.4 percent. Spending was up a stronger-than-first-reported 0.2 percent in June, echoing yesterday’s upward revision to personal consumption in the second look at Q2 GDP. Spending in July was boosted by a large rise in durable goods spending. Durable goods consumption rose a strong 0.6 percent on the month, though price discounts resulted in a 0.8 percent increase on a real basis. Consumption of nondurable goods was up a solid 0.5 percent in July, though inflation cut that gain to 0.3 percent in real terms. Services were less of a lift in July, and its 0.2 percent growth was essentially flat after accounting for price changes.

We knew that the disappointing report in June was largely the result of one-off factors, and yesterday’s second look at GDP—which showed a stronger consumer helping boost GDP to 3 percent in the second quarter— suggested the consumer was in solid shape at the start of H2. Still, today’s strong personal income and spending report provides reassuring evidence that momentum continued into the second half of the year. Though the business side of the U.S. economy has perked up recently, the consumer still holds the reins. Strong income growth, particularly when that strength is coming from the job market boosting wages and salaries, should help keep consumers’ spirits up near the recent highs indicated in consumer surveys, which bodes well for spending in H2.

Inflation Remains Tame

Both core and headline PCE deflators rose 0.1 percent on the month, as expected. The gap between headline and core PCE growth has closed as the effects of the decline in energy prices phase out of the year-to-year calculations. Core PCE inflation is now up just 1.4 percent from last year, which is the furthest it has been from the Fed’s target since December 2015. Historically, PCE data in the second half of the year tends to be revised upward, and this residual seasonality in the government data is no secret to the FOMC.

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