Personal Income Rebounds In June With Flat Consumer Spending

Disposable personal income (DPI) is rising again, but consumption remains flat. That’s the message in today’s update for the June income and spending report from the Bureau of Economic Analysis. The trend is certainly encouraging on the income front. But the unchanged level of personal consumption expenditures (PCE) is a problem if it continues. Then again, it’s not surprising that the public is inclined to save these days. The paradox of thrift may be a bigger problem in the months ahead if the urge to save rolls on and/or accelerates. But the fact that DPI has made an impressive rebound in terms of its growth rate in June suggests that it’s still premature to expect the worst. Savings mixed with higher income is hardly a sign of an economic apocalypse. Then again, one month alone never tells us much.

With that caveat in mind, here’s how the last 12 months compare for DPI and PCE. The revival in income offers encouragement, or so it appears, but the monthly numbers are subject to lots of volatility and so it’s hard to see through the noise.

Rolling one-year percentage changes offer a clearer picture of what’s been going on. As the second chart below shows, DPI is looking healthier these days on a year-over-year basis. PCE is merely flat lining in terms of changes in its annual pace, but that’s better than the descent that was the norm in previous months. Indeed, PCE stuck at roughly 3.5%, as it has been for the last two months, isn’t exactly a danger sign for the business cycle.

The case for modest optimism, it seems, isn’t beyond the pale… yet. The expected train wreck for spending and income is still MIA. The future is still uncertain, but based on the numbers reported today through June, the annual rates of change make it a bit harder to argue that income and spending are signaling that a new recession recently started or is imminent in the month ahead.
But let’s not minimize the risk linked with the big fade on consumption lately. Joe Sixpack’s spending still makes up roughly 70% of U.S. GDP and so it’s hard to get excited about economic growth if PCE stays flat. What might induce stronger consumption numbers going forward? Second to none on the list of factors is the labor market. Unfortunately, growth in nonfarm payrolls has been weak lately, as the June jobs report reminds.
Will the labor market’s growth rate perk up? The consensus forecast via suggests that we might see slightly better numbers on Friday (Aug 3) for the July payrolls report—a net rise of 100,000 for private-sector jobs vs. 84,000 for June is the crowd’s guess.
That’s better than a declining rate, but it’s still unimpressive. As for a negative surprise of some magnitude, well, let’s just say that we’re just about out of room for exogenous shocks to the labor market with major repercussions. Yes, it’s a precarious existence in macro analysis at the moment, but we still have to take each number as it comes.
On the somewhat brighter side, the growth in personal income seems to be reviving. And not a moment too soon. What’s behind DPI’s recovery? One rather large clue can be found in private-sector wage growth, which rose 4.2% in June vs. the year-earlier level. That’s the highest annual rate since October 2011—one more sign that it’s still premature to assume that the economy has already tipped over the edge.
Surprised? You shouldn’t be. As I noted a few weeks ago, recession risk for June, based on a broad reading of leading and coincident indicators, was relatively low. Today’s update on income and spending supports that view.
July, of course, is another matter. But using the numbers we have so far, there’s a strong case for arguing that June wasn’t the start of a new recession. Will that narrative hold up once we have a full set of July numbers? For some perspective, your favorite forecaster will be more than happy to give you an earful.