American personal income increased robustly in July, likely because of the expanded child tax credit that we think will bolster overall spending by roughly $35 billion this year.
Once government transfers are accounted for, personal income rose a more modest and sustainable 0.2% on the month.
Once government transfers are accounted for, personal income rose a more modest and sustainable 0.2% on the month, according to government data released on Friday.
So for now, that targeting of American families with the tax credit put in place this year has offset the growing economic risk from the delta variant and rising prices as top-line spending increased by 0.3% in July.
This will be the last of the major data publications that is not affected by what we can all observe: a public pulling back in the face of risks surrounding the delta variant. We expect overall spending to decelerate in August and most likely in September.
We expect consumer spending in the current quarter to advance at between a 4% and 5% rate, which is rather modest compared to the boom-like 11.9% in the second quarter.
One of the themes we expect to be part of the economic and spending narrative will be exactly how much of the expanded child tax credit is spent, how much is saved and the extent to which it drives spending as the delta variant peaks and extracts a powerful toll on economic activity.
We expect that the tax credit will play a prominent role in the upcoming budget battle and in negotiations for the fiscal year 2022-23 budget heading into next year’s midterm elections.
Beneath the top line
U.S. personal income increased by 1.1% in July as spending increased by 0.3%. Once one adjusts for inflation, real spending declined by 0.1%. Disposable personal income advanced by 0.7%, while the savings rate increased to 9.6% from 8.8%, which is almost surely a function of the expanded child tax credit.
Overall compensation was up by 0.9%, wage and salaries increased by 1%, and disposable income climbed by 1.1%. On an inflation-adjusted basis, disposable income rose by 0.7%. This should bolster consumer confidence as the delta variant peaks, possibly this fall.
Inflation peaks?
The personal consumption expenditure deflator increased by 0.4% on the month and was up by 4.2% on a year-ago basis. The Fed’s policy variable, the core PCE deflator, was up by 0.3% on the month and increased by 3.6% on a year-ago basis, which is unchanged from June.
Given the supply chain disruptions in Asia, top-line inflation and the core policy variable will most likely be somewhat bumpy going forward. While we think the worst in terms of inflation is likely in the rear-view mirror, it will be some time before those disruptions dissipate. We expect a modest decline in the core variable through the end of the year, with a move back toward 2% near the end of next year.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
