Income & Spending Update Boosts July’s Economic Profile

Today’s update on personal income and spending offers a fresh batch of data for thinking that recession risk remains low. Disposable personal income (DPI) continued to inch higher in July on a month-over-month basis. Meantime, personal consumption expenditures (PCE) staged a sharp revival in July, rising 0.42% vs. June—the best monthly improvement since February. As a result, the year-over-year trends for these indicators look considerably better—signs that income and spending may be stabilizing at moderate growth rates.

Here’s how the monthly profile compares over the past year:

The stronger July numbers clearly make a difference for the year-over-year profile. In particular, note that the annual percentage increase in income has been moving higher for five of the last six months. That’s a powerful clue for thinking that consumer spending isn’t poised to fall off a cliff, as some analysts have been predicting. Granted, spending’s annual rate of growth is still slipping, but given the improvement in income of late it’s reasonable to expect that PCE will stabilize at current levels if not turn moderately higher.

Reviewing the economy from a broader perspective also leaves room for optimism that the moderate growth of late will roll on for the foreseeable future. With today’s update, we have a nearly complete picture of July’s economic activity. As the table below reveals, the overwhelming majority of key indicators I track trended positive through July. That’s no guarantee that economy will enjoy smooth sailing in the months ahead. But if you’re looking for clear and pervasive signs that a recession has started, or is at high risk of commencing in August, you won’t find much support in the latest set of numbers.

Plugging the indicators above into a diffusion index offers another perspective on the broad economic trend. As the next chart below shows, the percentage of these leading and coincident metrics trending positive remains above 80%–a strong sign that recession risk is low.

With July all but certain to go into the history books as another month of economic growth, the focus now turns to the August numbers, which start rolling in next week. Yes, the world is still rife with risks, and economic growth in the U.S. is sluggish. But based on the data so far, modest positive momentum still has an edge over cyclical darkness.
Correction: Decimal-point malfunction: An earlier version of this story incorrectly stated that personal consumption expenditures rose 4.2% in July. Actually, PCE rose 0.42%