Strong Increase in Personal Income is Temporary, Consumer Spending on Track for Decline in Q2
Personal income moved up 1.4% in May after a 0.7% increase in the prior month. Both of these strong monthly gains reflect temporary payments arising from the provisions of the American Recovery and Reinvestment Act of 2009 (fiscal stimulus). Wages and salaries declined 0.1% in May following a 0.1% increase in April, which is more representative of the underlying economic conditions compared with the overall gains in personal income. This temporary boost will be reversed when the June report on personal income is published.
As a result of only a moderate increase in nominal consumer spending (+0.3%) and a temporary boost to personal income, personal saving as a percent of disposable income shot up to 6.9% in May. As noted earlier, the personal saving rate should be smaller when personal income is scaled back in June but the future trajectory of saving is likely to show an upward movement in the months ahead.
After adjusting for inflation, consumer spending increased 0.2% in May vs. a 0.1% decline in April. A 0.9% increase in outlays of durables, a 0.9% gain in expenditures of non-durables, and steady expenditures on services were the breakdowns of the components of consumer spending. The April-May data and a conservative estimate of spending in June suggest that consumer spending is most likely to show a decline in the second quarter after a 1.4% gain in the first quarter.
Real consumer spending dropped 1.9% from a year ago vs. a 1.8% decline in April. The year-to-year drop in May is the largest on record for the current recession.
The overall personal consumption expenditure index and the core measure both moved up 0.1% in May. On a year-to-year basis, the core personal consumption expenditure index increased 1.85% in May, which is close to the Fed’s preferred pace of core inflation.
In other related news, the University of Michigan Consumer Sentiment Index rose to 70.8 in June from 68.7 in May. The preliminary estimate for June was 69.0. The upward revision of the Expectations Index to 69.2 from 65.4 from the early estimate was the reason for the upward revision. The Current Conditions Index stands at 73.2 in June vs.67.7 in May (the early-June estimate was 74.5).
