Spending Gains Will Boost Q3 GDP, but Are Not Sustainable
- U.S. Personal Income increased by 0.3 percent in July, supported by rents and dividends.
- After inflation and taxes, Real Disposable Income declined by 0.1 percent.
- Personal Consumption Expenditures increased by 0.8 percent, fanned by a heavy air conditioning load.
- The PCE Price Index increased by 0.4 percent in July. Core prices gained 0.2 percent.
- The Texas Manufacturing Outlook Survey showed sustained business activity in August.
Personal income in July increased by 0.3 percent, in line with consensus expectations. Wage and salary disbursements gained 0.4 percent, looking more like a bounce off a weak June increase rather than a sign of improved labor market conditions. Nonwage income got a boost from rental income, which increased by 1.3 percent for the month, and by dividend income, which gained 1.0 percent. The July report shows a strong gain to personal spending, up 0.8 percent after stagnating through May and June. Total spending was boosted by a 0.7 percent increase in the services component. No explanation was given for the strong spending on consumer services but it was likely driven by hefty air conditioning bills as a summer heat wave settled over the South. The PCE price index increased by a moderately strong 0.4 percent in July as energy prices bounced off earlier lows. The core PCE price index gained 0.2 percent. Over the past 12 months the core PCE price index is up 1.6 percent, still within the Federal Reserve’s “comfort zone.” After adjusting for inflation and taxes, real disposable income dipped by 0.1 percent in July. Real consumer spending increased by 0.5 percent, supportive of slightly stronger real GDP growth in the third quarter. With spending growing ahead of income, the personal saving rate dipped from 5.5 to 5.0 percent in July. This augers for more restrained spending in August as households rebalance. The dive in consumer sentiment in August also suggests that spending for the month was restrained.
The Dallas Fed Manufacturing Outlook Survey showed that factory conditions were largely unchanged in August. Most businesses reported increases in production and new orders, but the rate of improvement has slowed. The Dallas survey contrasts other regional manufacturing surveys that have shown significant production declines in August.
Market Reaction: U.S. equities opened on the upside and are holding onto early gains. Treasury yields are up at both ends of the yield curve. Oil is up to $88.91/barrel. The dollar is up against the yen and down versus the euro.