US personal income and spending were both strong - RBS

Research Team at RBS, suggests that the US personal income and spending were both strong in July, rising by 0.4% and 0.3%, respectively, with upward revisions in the prior month(s).

Key Quotes

“The strong performance in June and July puts consumer spending on a healthy trajectory for Q3. Indeed, on top of a 4.4% annualized gain in Q2, real PCE may rise better than 3% annualized in Q3 (we now look for a gain of 3.2%).

In July, wages and salaries grew by a healthy 0.5%, reflecting strong labor market conditions in the month (payrolls +255,000, an extension in the workweek from 34.4 hours to 34.5 hours, and an above trend 0.3% gain in average hourly earnings). On a year/year basis, wages and salaries were up 3% in inflation adjusted terms, only marginally higher than the current spending pace. In July, the savings rate ticked up from 5.5% to 5.7%.

In July, spending (in inflation adjusted terms) was led by durables (autos +4.5%, furniture +1.0%), while service sector outlays rose by 0.2% (utility usage increased by another 1.4%; expenditures in this category have surged by over 18% not annualized since March, reflecting unusually warm temperatures). In contrast, spending on nondurables was weak (0.1%), as a modest 0.6% rise in gasoline station sales (in inflation adjusted terms) was more than offset by a 0.2% decline in apparel sales.

Finally, on the inflation front, the headline PCE deflator was flat, while the core PCE deflator rose by just 0.1% (+0.09077 unrounded). On a year/year basis, the headline measure ticked down from 0.9% to 0.8% while the core measure held steady at 1.6% for a fifth straight month.

Overall, this report is a mixed bag for the Fed. While the consumer sector is continuing to advance solidly, progress towards the Fed's 2% inflation mandate has stalled. Data such as this strengthen the case for an increase in the fed funds rate but do not suggest an urgency for policymakers to act in September.”