Due to households pulling back as the pandemic intensified, we expect a noticeable negative print in the July personal income and spending report alongside further losses in income.
The American household finds itself under extreme duress as loss of income and jobs caused by the pandemic is on vivid display inside the June U.S. Personal Income and Spending Report. Despite a robust increase in spending, based on income dynamics that are in play during the pandemic, it is quite clear that this is not sustainable and represents the zenith in the release of pent up demand following the reopening of the economy in May.
We have made the case that U.S. household spending peaked on or around June 24, and has moved modestly downward since. Due to households pulling back as the pandemic intensified, we expect a noticeable negative print in the July personal income and spending report alongside further losses in income. Through July 19, total U.S. spending is down 6.4% relative to January 2020 levels.
In June, income declined by 1.1%, and was revised down from a 4.2% loss to a 4.4% drop in May. Disposable personal income dropped by 1.4% and after adjusting for inflation, was down 1.8% in the month. Personal income, excluding transfers, increased 1.4%, and was down 3.6% on a year-ago basis. Compensation increased by 2.3%, while wages and salaries advanced by 2.2%.
Savings rate remains elevated
Until wealthy consumers are comfortable returning to a more aggressive pace of spending, and those income losses are reversed, the monthly increase in spending is simply not sustainable.
The U.S. savings rate remains elevated at 19%, down from 24.2% in May. This is almost surely a function of an increase in savings by the upper two income quintiles, which are responsible for roughly 61% of all spending. Spending by wealthy households has declined by 9.8% relative to January 2020. Spending by middle-income consumers has dropped by 5.3%; by lower income consumers spending is down 2.3%.
Income losses were somewhat tempered by a 5.6% increase in spending and an upward revision to an 8.5% gain in spending from the initial 8.2%. Until wealthy consumers are comfortable returning to a more aggressive pace of spending, and those income losses are reversed, the monthly increase in spending is simply not sustainable.
The Personal Consumption Expenditure Deflator increased by 0.4% on the month, while the core PCE, excluding food and gasoline, advanced 0.2%. The Federal Reserve’s preferred inflation variable increased 0.9% on a year-ago basis, denoting risks around the pricing outlook associated with disinflation. We have made the case that in the near- to medium-term risks to the economic outlook are skewed to the downside, associated with disinflation or outright deflation. In his most recent press conference, Federal Reserve Chair Jerome Powell made that same case. Given what appears to be a stall in economic activity over the past two months, we would expect further downward pressure on the overall price level this year.
