Fascinating transition underway in personal income and spending

Summary

The details in today's personal income and spending report for June reveal a fascinating story of transition in how U.S. consumers are making money as well as the way they are spending it. Gone are the days of stimulus checks and buying stuff. Income growth outside of transfer payments shot up 0.7% in June and service spending outpaced durable goods outlays for a third straight month.

The durables paradox: Monthly declines and a quarterly gain

Personal income increased 0.1% in June and spending increased1.0%; both numbers exceeded consensus expectations. Some of the fanfare of today's better-than-expected outturn was uncorked in yesterday's initial estimate for GDP growth. We have maintained a rosy outlook for second-quarter consumer spending even in the face of some initially disappointing data during the quarter.

Central to our call was the notion that June would be a major surge in activity, particularly in the services sector. This was picked up in our dashboard of high-frequency consumer indicators, but it also had to do with the post-mask-mandate reopening of the services economy. June was the first full month that the mask mandate was not in effect (the restrictions were lifted mid-May).

Since we were banking on services spending to drive the growth, one thing that surprised us in yesterday's GDP report was how strong durable goods spending was in the second quarter coming in at a 9.9% annualized growth rate. But in today's report we see real durable spending down slightly in each of the past three months(see chart). How does that add up? The answer lies in a big 15.0%surge in March when stimulus checks boosted durables outlays. That lifted the level of durables spending so much that even after accounting for three straight monthly declines the average level of goods spending in the second quarter was much higher. On a sequential basis, however, services spending is what really powered growth in the second quarter. 

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