Personal income was up 0.5% month-on-month (m/m) in March, a notch higher than the consensus estimate (+0.4% m/m). February growth was revised up to +0.7% m/m from +0.5% m/m reported earlier.
Strong growth in compensation of employees (+0.5% m/m) remains the biggest driver, with both private and government sector wages rising. Proprietors’ income also came in strong at 0.8% m/m. Personal income receipts on assets (+0.4% m/m) and government social benefits (0.3% m/m) were also positive, led by personal interest income and Medicare/Medicaid, respectively.
Removing the effect of price changes and taxes, real personal disposable income declined by 0.4% m/m in March, but February’s decline of 0.2% m/m was revised to a positive reading of 0.1% m/m.
Nominal personal spending rose by 1.1% m/m in March, well above the consensus estimate (+0.6% m/m). This is on the back of a much stronger February print, which was revised to +0.6% m/m vs. +0.2% m/m reported in the preliminary estimate.
- Goods spending was up by 1.1% m/m from upwardly revised growth of 0.3% in February (originally -1.0% m/m). Higher prices of gasoline and other energy goods primed growth in non-durables (+2.5%m/m), while durables were in the red this time, dropping 1.0%m/m on the back of an upwardly revised February’s reading.
- Services spending rose by 1.1% m/m, while the February reading was adjusted down to 0.8%m/m (originally +0.9% m/m). The gains were broad-based and led by “other” services (which includes international travel).
In real terms, spending was up 0.2% m/m, stronger than expected by the market (-0.1% m/m). Real goods spending was behind the drag with a decline of 0.5% (both durables and non-durables declined in real terms). Real services spending was up 0.6% m/m for the second months in the row.
The PCE price deflator rose by 0.9% m/m in March (as expected), which translated into 6.6% in year-over-year (y/y) terms (vs 6.7% expected). Excluding food and energy, core PCE inflation was up 0.3% m/m (as expected) and 5.2% y/y (vs. 5.3% expected).
The personal saving rate remained below its pre-pandemic average of 7.5% with a reading of 6.2%, indicating that consumers continue to tap into a pool of excess saving accumulated during the two years of the pandemic.
Key Implications
In contrast to yesterday’s headline GDP reading, nothing spells “recession” in today’s release. Quite the opposite – at 2.7% quarter-on-quarter (annualized) real growth in personal expenditures was higher than our expectations for 2.4%. As expected, spending is also increasingly transitioning away from goods in favor of services. Notably, outlays on services have now fully recovered to its pre-pandemic level in real terms. We expect consumer spending growth to track a similar pace in the second quarter, with the services sector doing most of the heavy lifting.
Another reason for optimism is broad-based strength in income, which points to strong fundamentals that can support consumption going forward. Keeping in mind that households are armed with backup power of excess saving. The fact that higher income growth has not resulted in exuberant goods spending (in real terms) suggests that consumers remained level-headed to not front run their purchases on an expectation of persistently higher prices.
Surely, inflation remained hot, yet softer-than-expected year-on-year readings are very welcome. The Fed has more work to do to keep consumers convinced that inflation won’t run away. Federal Reserve Chairman Jerome Powell has essentially committed to a 50 basis point hike in May, and he may need to telegraph his readiness to do just as much in June to keep this conviction intact.
