Economics week ahead

U.S. week ahead

Personal income & spending • Thursday

Consumer resilience is holding for now, but underlying fundamentals continue to erode. Incoming data—like control group retail sales and higher-frequency card data—point to a solid nominal consumption backdrop in May. We look for personal spending to rise at a 0.6% clip in May, though most of that gain will merely reflect higher prices stemming from gasoline rather than a broad pickup in sales volumes.

We expect the PCE deflator to increase 0.5% during the month as well, leading the year-ago rate to surpass 4%, with the acceleration still largely driven by energy-related costs. In other words, nominal spending is firm, but real consumption remains far less impressive.

Remember it's larger average tax refunds that have offset higher gasoline prices in recent months, but that tailwind is fading as refund flows slow. There may be a new near-term offset form World Cup-related spending—particularly at restaurants and related categories in broader PCE—in coming months, but that is unlikely to alter the broader trajectory amid weak consumer fundamentals.

The underlying income backdrop is weak. Real disposable income excluding transfer payments has slipped into negative territory on a year-ago basis, while saving rates are bumping up against historic lows, signaling consumers are increasingly spending more of their income to sustain spending. We expect broad nominal personal income advanced 0.4% in May, but was negative when accounting for inflation. Spending should hold up in Q2; it's on track to rise at a decent, yet unspectacular, ~2% annualized pace.

Download the Full Report!