Personal income grew 0.3% month-on-month (m/m) in June, which was below market expectations for 0.5% growth. This marked a deceleration from the prior month’s gain of 0.5%. Gains were led by compensation to employees, which also rose by 0.5% for the third consecutive month.
Accounting for inflation and taxes, real personal disposable income rose 0.2% m/m, slightly slower than the 0.4% growth posted the previous month.
Personal consumption expenditures rose 0.5% m/m, a marked acceleration from the 0.2% gain in May (revised higher from 0.1%). June’s reading came in just above market expectations for 0.4% growth.
- Expenditures on services grew 0.4% m/m for the second consecutive month. Spending on financial services and insurance, housing and utilities, and recreation were the primary contributors to movements in the services category.
- There was also an increase in goods spending. Goods spending rose by 0.8% m/m, a rebound from the 0.3% decline posted in May. There was an improvement in spending on both durables (1.4%) and non-durables (0.5%)..
Adjusting for inflation, real spending grew 0.4% for the month, coming in just above the consensus estimate for a 0.3% gain. In real terms, goods spending was up 0.9% m/m, while services were up a more muted 0.1%.
The personal consumption expenditure (PCE) price deflator rose 0.2% m/m, and 3.0% on a year-on-year (y/y) basis – right in line with market consensus forecast and below May’s reading (3.8% y/y).
The core PCE price deflator (which excludes food and energy and is the Fed’s preferred measure of inflation) rose 0.2% m/m, again in line with the consensus forecast and below May’s reading (0.3%). On an annual basis, core PCE inflation decelerated to 4.1% y/y from 4.6% y/y the month prior (consensus forecast was 4.2% y/y). This is the first time in the last seven months that the measure has gone below 4.6%.
The personal saving rate was 4.3% in June, which was 0.3%-pts below the 4.6% reading in May.
Key Implications
U.S. households were feeling optimistic in June, and it showed in their spending. Despite high prices and tightening credit conditions, consumers did their part to keep economic growth in positive territory. As such, growth in real consumption expenditure for 2023 Q2 was 1.6% annualized (down from 4.2% in 2023 Q1), and was the primary contributor to the above-expectations 2.4% (q/q annualized) growth in real GDP. Services spending did most of the heavy lifting, but goods spending also lent a helping hand.
On the prices side, inflation has been trending in the right direction, but the Fed is yet to be convinced of its staying power. With its preferred measure still hovering above 4%, the Central Bank delivered on its promise, raising its policy rate this week to a 22-year high. The Fed’s task is complicated by the fact that real incomes are rising, which keeps the spending power of consumers intact. While good for consumers, it continues to complicate the Fed’s task of bringing inflation in line with target. Still, a resilient consumer and strong labor market increase the odds that the Fed will eventually get to target without tipping the economy into a recession. The Central Bank may just have to exercise a bit of patience in the interim.
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