Personal income was up 0.4% month-on-month (m/m) in April, a notch lower than the consensus estimate (+0.5% m/m). There were revisions to the previous month’s reading (+0.5% m/m reported earlier). Strong growth in compensation of employees (+0.6% m/m) remains the biggest driver, while proprietors’ income weighed on the headline reading, declining 0.5% m/m.
Removing the effect of price changes and taxes, real personal disposable income was flat in April, while March’s decline of 0.4% m/m was revised to an even lower reading of 0.5% m/m.
Nominal personal spending rose by 0.9% m/m in April, above the consensus estimate (+0.8% m/m). This is on the back of a much stronger March print, which was revised to +1.4% m/m vs. +1.1% m/m reported in the preliminary estimate.
- Goods spending was up by 0.8% m/m from upwardly revised growth of 1.9% in March (originally 1.1% m/m). Non-durable goods expenditures declined by 0.1% m/m, while spending on durable goods rose by 2.4% m/m, with motor vehicles and parts contributing most to the rise. Meanwhile, March’s readings were revised up, with durable goods spending reversing its negative print.
- Services spending rose by 0.9% m/m, while the March reading remained flat at +1.1% m/m. The gains were broad-based and led by food services and accommodations, as well as housing and utilities.
In real terms, spending was up 0.7% m/m on par with market expectations. Real goods spending came in strong at 1.0% m/m, with both durables and non-durables rising in real terms. Real services spending was up 0.5% m/m, which makes it the fourteenth consecutive month of growth, after revisions.
The headline PCE deflator continued to climb higher but at a slower clip, rising by 0.2% m/m in April (as expected) vs. 0.9% m/m in March. This translated into 6.3% in year-over-year (y/y) terms (vs 6.2% expected). Excluding food and energy, core PCE inflation was up 0.3% m/m (as expected and matching the March print) and 4.9% y/y (as expected).
The personal savings rate dropped to 4.4% – much lower than its pre-pandemic average of 7.5%, indicating that consumers continue to tap into a pool of excess saving accumulated during the two years of the pandemic.
Key Implications
Don’t stop me now! Consumers are having a good time, even if they are not feeling it. We wrote previously that, despite consumers’ negative attitude towards spending, their desire to make up for lost time during the pandemic should keep demand strong, especially for spending on services which feel non-discretionary in the short run. Meanwhile, demand for cars remains largely unsatiated and will continue to absorb tight supply, priming durable goods spending. This puts us on track for 2.3% (annualized) gain in real consumption in Q2 2022.
Inflation strikes a sour note, spoiling the party mood again. Real disposable income seem particularly benign with average growth rate of -0.3% in the past six months. With monthly spending growing at +0.2% on average over the same period, the only way for households to continue to spend at this rate will be through eating into their savings (which remains substantial at over $2 trillion) or by borrowing more.
The latter may start inflicting the pain soon enough as rates rise by another percentage point by the end of this quarter. This should help cool consumer demand, especially for the more interest-sensitive consumption items. Paradoxically, softer spending now will mean less pain for the economy in the long term as it will tame inflation. Consumers know it too: they expect that high inflation environment will taper off in the next three years and not persist beyond that. With a bit of luck and rational thinking, we hope that the Fed will be able to deliver on that elusive promise of a soft landing.
