Personal income grew by 0.2% m/m in August, in line with the consensus estimate. Compensation of employees (+0.4% m/m) was the highest contributor to growth, as employment continued to make gains in August. Excluding price changes and taxes, real personal disposable income was lower by 0.3% m/m.
Nominal spending advanced by 0.8% m/m, a tick higher than 0.7% anticipated by the consensus, but from a downwardly revised July (-0.1% from 0.3% originally). Spending on services increased by 0.6% m/m, but was slower than the 1.1% trend of the previous three months – likely a reflection of an increased adherence to physical distancing due to a spike in COVID-19 cases. Meantime, spending on goods accelerated, rising by 1.2% m/m (with a reading of -0.4% m/m for durables and 2.1% for non-durables).
Removing the price impact, real spending increased by 0.4% m/m, as expected by the consensus estimates. Real services rose by 0.3%, while goods gained 0.6% m/m.
The overall PCE price deflator rose by 0.4% m/m and 4.3% y/y in August – slightly faster than 4.2% y/y growth in July. The Fed’s preferred measure of inflation – core PCE price index – remained on par with July’s gains, rising by 0.3% m/m and 3.6% y/y, on par with the consensus expectation.
The personal saving rate remained elevated at 9.4% – well above its normal rate of 7.5% observed before the pandemic.
Today’s report proved consumers to be more resilient than expected. A closer look at the composition of expenditures suggests that Delta-related caution played the lead role in slowing the rebalancing from goods to services, at least in August. Higher frequency data points to this pause extending into the early September, but reversing recently, raising hopes that the latest wave of caution is cresting. With this weakness incorporated, our forecast calls for around 3% (annualized) growth in real consumption in the second half of 2021.
Decent personal income growth is a positive sign, especially given it stems from an increase in employment income, which is taking over government income programs in supporting consumption. If sustained, this pace of growth might give an additional boost to spending, especially when combined with a backup power of excess saving.
Strong price growth puts more pressure on the Fed amid the growing agreement that supply bottlenecks may extend price pressures into the next year. This week, Federal Reserve Chairman Jerome Powell acknowledged that these constraints may prove to be “greater and more enduring than anticipated” and gave indications that the Fed is prepared to act more aggressively if needed. Still, for now, the Fed is only comfortable to start reducing its asset purchases, which we expect to start by the end of the year. The policy rate should remain near zero until more progress in the labor market is achieved.