Q1 GDP Revised Down Again, May Income/Spending Data Consistent with Q2 GDP Rebound
- U.S. Personal Income increased by 0.4 percent in May, with solid wage growth.
- After accounting for inflation and taxes, Real Disposable Personal Income also gained 0.2 percent.
- Real Personal Consumption Expenditures decreased by -0.1 percent in May.
- First quarter Real GDP growth was revised down to a -2.9 percent annual rate.
- Initial Claims for Unemployment Insurance for the week ending June 21 dipped by 2,000 to hit 312,000.
Income and spending data for May are consistent with a positive, but complex, characterization of the U.S. economy. Yesterday, we saw the big negative revision to 2014Q1 real GDP, down to a -2.9 percent annualized growth rate. Today, we see solid income numbers for the mid-point of Q2, supported by moderate-to-strong job growth through the first two months of the quarter. Nominal personal income increased by 0.4 percent in May. The wage and salary component of income also increased by 0.4 percent. Dividend income has also been strong lately, growing by 1.2 percent in May, extending a four-month streak. The PCE price index was up 0.2 percent in May, the third month in a row at a 0.2 percent gain. On a year-ago basis, the PCE price index was up by just 0.8 percent in February. In May it was up by 1.8 percent. So we see clear evidence of inflation starting to warm up. After adjusting for inflation and taxes, real disposable income was up by 0.2 percent in May. Real consumer spending dipped by 0.1 percent, bringing the personal saving rate up to 4.8 percent. The May decline in real spending was preceded by a 0.2 percent dip in April. The main drag on spending has been in the services component. The estimates for services spending are being complicated by the rollout of the Affordable Care Act earlier this year. We know that auto sales are doing well, with May unit sales up to a 16.8 million unit annual rate. We also know that both new and existing home sales picked up in May. So we can say that the discretionary component of consumer spending is in good shape. For the quarter, real consumer spending is on track to increase moderately at about a 1.5 percent annual rate. That rate of consumer spending would be consistent with a rebound in Q2 real GDP growth to about a 2.5 percent annualized rate. Recent estimates of 4.0 percent GDP growth in Q2 look too strong, but it still looks like we will see a GDP rebound in Q2 and a resumption of moderate real GDP growth, in the range of 2.5 to 3.0 percent, through the second half of the year.
The big downward revision to Q1 real GDP, to a -2.9 percent annual growth rate, was largely due to a muddled estimation of the service component of consumer spending by the Bureau of Economic Analysis, again, complicated by the rollout of the Affordable Care Act. A confluence of transitory events pulled the quarter down. Weather, an inventory correction and the federal spending sequester lined up in a bad way. Other economic metrics are consistent with ongoing moderate economic expansion. This includes initial claims for unemployment insurance which remain low and consistent with a declining unemployment rate. Initial claims dipped by 2,000 for the week ending June 21, to hit 312,000. Continuing claims for unemployment insurance edged up by 12,000 to hit 2,571,000 for the week ending June 14.
Market Reaction: U.S. equity markets opened with losses. The yield on the 10-year Treasury bond is down to 2.53 percent. NYMEX crude is down to $105.63/barrel. Natural gas futures are down to $4.53/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Personal Income 062614.