Cool Inflation Boosts Real Income, Consumers Spend It
- U.S. Personal Income increased by 0.3 percent in July, as it did in May and June.
- Personal Consumption Expenditures were up by 0.4 percent after inflation, a solid start to Q3.
- The PCE Price Index was unchanged for the month. Food and energy will add to inflation in August.
- Initial Claims for Unemployment Insurance were unchanged for the week ending August 25.
Stronger job growth at mid-summer helped to keep personal income growing at a moderate pace, up 0.3 percent for each of the three months ending in July. Low inflation kept the nominal gains real. The PCE price index was unchanged in July, and was essentially unchanged from last March, reflecting the drop in energy prices, both gasoline and natural gas, through the spring. On a year-over-year basis the PCE price index is up just 1.3 percent as of July. Going forward, both gasoline and natural gas prices will boost energy prices, with consumer food prices also on the rise. But in July flat inflation and flat taxes meant that real disposable income also gained a respectable 0.3 percent. Consumers were holding onto their wallets in May and June, with real consumer spending essentially unchanged for those two months. But in July the pent-up demand was unleashed and real consumer spending increased by 0.4 percent. With spending up more than income that meant that savings had to make up the difference, and we see that the personal saving rate dipped slightly to 4.2 percent in July. The solid start to third quarter consumer spending is a positive indicator for Q3 real GDP growth, setting the stage for a near two percent annualized growth rate. Real per capita income has increased steadily this year. That, combined with firming house prices in most markets, is starting to repair some of the damage to household finances wrought by the Great Recession.
Initial claims for unemployment insurance were unchanged for the week ending August 25, holding at 374,000. Claims numbers dropped through the first quarter of this year, then increased in April and June. Lately the trend has been sideways, showing no consistent improvement. On the one hand we can say that firing has not increased, but on the other hand it is evident that hiring remains less than stellar. Payroll job gains for August, due out September 7, now look to be only moderate at best, in the range of 120,000 to 140,000 jobs, stepping down from the July increase of 163,000.
Market Reaction: U.S. equities markets opened weakly. U.S. Treasury yields are down at both ends of the yield curve. Oil is down to $95.12/barrel. The dollar is down against the euro and the yen.