US: PCE deflator and personal income and spending data awaited - Nomura

Research Team at Nomura, notes that the US personal income grew at a sluggish pace again in June, increasing by only 0.2% m-o-m and although aggregate income grew by only 0.2%, wages and salaries grew at a better pace of 0.3% m-o-m.

Key Quotes

“We should see better income growth in July as nonfarm payrolls gained an additional 255k workers and hourly wages picked up. On these positive numbers, we forecast that personal income grew by 0.6% in July.

On the spending side of the ledger, we expect another month of steady consumption in July. Strong vehicle sales and a pickup in demand for energy services in July suggest spending on durable goods and services was robust. But on the downside, core retail sales in July were weak, with many nondurable spending categories showing only modest gains or a decline in spending. All in all, our bottom-up approach suggests that aggregate personal spending grew by 0.4% in July.

PCE deflator: The relevant elements of the PPI report for the core PCE price index were, on net, slightly negative. Among the major items, the price index for physician services rose, but only modestly, and hospital service prices were flat in the month. Moreover, the price index for scheduled passenger air transportation declined slightly after a 6.2% advance in the previous month. Also, the decline in core goods prices and deceleration in rent inflation from the CPI report suggest that these categories will also likely weigh on the core PCE price index.

Taking all these factors into account, we forecast a 0.1% (0.060%) m-o-m increase in the core PCE price index in July, which would lower the y-o-y change rate to 1.5% from 1.6% previously. On the non-core components, based on CPI food and the energy price index for July, we expect both components in the PCE deflator to decline in July. Taking all components into account, we forecast that the headline PCE deflator was unchanged on a rounded basis m-o-m (unrounded: -0.01% m-o-m), lowering the y-o-y comparison to 0.8% from 0.9%.

Note that since the annual revisions in July, the BEA started seasonally adjusting some service components of core PCE price index that had not been seasonally adjusted previously, such as transportation, communication, and insurance. Given that the July reading of core PCE price index is the first release after some methodological changes were introduced, there is more uncertainty than usual around our forecast for the next print of core PCE price index.”