Income and Spending Post Gains in July

By Robert Hughes

Personal income rose 0.3 percent in July, according to data from the Bureau of Economic Analysis. The gain in personal income was supported by a 0.4 percent increase in wages and salaries. Wages and salaries account for about half of personal income. Supplements to wages and salaries (primarily employer contributions to pension and insurance funds and government social-insurance programs) account for another 12 percent of personal income and posted a 0.2 percent rise in July. Proprietors’ income was unchanged for the month while income on assets (interest and dividends) increased 0.3 percent. Personal tax payments rose 0.1 percent, helping disposable income gain 0.3 percent. In real terms, disposable personal income rose 0.2 percent for the month and is up 2.9 percent over the past year.

From a year ago, disposable personal income is rising at a 5.3 percent rate while personal consumption expenditures are up 5.2 percent. Both growth rates are up significantly over the past two years (see chart).

On the spending side, total personal consumption expenditures (PCE) rose 0.4 percent in July. Among the components, durable goods fell 0.2 percent and nondurable-goods spending rose by 0.4 percent. Spending on services increased 0.4 percent for the month. After adjusting for price changes, real PCE increased 0.2 percent as a 0.5 percent decline in real durable-goods spending was offset by a 0.6 percent gain in real nondurable-goods spending and a 0.2 percent rise in real services. The personal savings rate, which was revised sharply higher in the benchmark NIPA revisions released last month, fell by 0.1 percentage points to 6.7 percent from 6.8 percent in June. A more comprehensive measure of savings is available in the quarterly flow-of-funds data from the Federal Reserve. That measure has typically shown a higher savings rate compared to the measure in the monthly personal income release.

The price indexes from the report on personal income and spending are the primary measures followed by the Federal Reserve. The total PCE price index increased 0.1 percent in July as durable-goods prices rose 0.4 percent, nondurable-goods prices fell 0.2 percent, and services prices increased 0.2 percent.

Over the past year, the PCE price index is up 2.3 percent, slightly ahead of the 2.2 percent recorded in June (see chart). Among the components, the core PCE index, which excludes food and energy prices, is up 2.0 percent from a year ago while the market-based PCE price index excluding food and energy is up 1.8 percent. That measure has been running below 2 percent since 2012.

Weekly data on initial claims for unemployment insurance show the labor market remains robust. Claims came in at 213,00 for the week ended August 25, an increase of 3,000 from the prior week. The four-week average fell to 212,250 from 213,750 in the prior week. The four-week average has been below 300,000 since September 2014 and is the lowest since 1969. As a share of payroll employment, claims continue to hit new record lows.

Overall, gains in disposable personal income should provide support for future increases in personal consumption. Healthy incomes, solid balance sheets, a tight labor market, and high levels of consumer confidence all suggest the outlook for consumers remains favorable. The data suggest the Fed is unlikely to significantly alter the current slow pace of policy normalization. Together, these support a positive outlook for the economy with a low probability of recession over the next several months and quarters.

 

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.