U.S. personal income rise strongly in July, household spending to continue rising in coming months

Personal income and spending both grew robustly in the U.S. in July. Personal income accelerated 0.4 percent in sequential terms, in line with consensus forecasts and higher than June’s 0.3 percent growth. Controlling for taxes and inflation, real disposable personal income also grew 0.4 percent. Price growth was stagnant in July.

Meanwhile, personal consumption, in both real and nominal terms, increased 0.3 percent month-on-month, on par with consensus forecast. Component wise, real spending on durable goods rose 1.9 percent, driving the overall increase. Spending on services increased 0.2 percent, whereas on non-durable goods, it dropped 0.1 percent.

June’s spending and income data were both upwardly revised in June, with personal income coming in at 0.3 percent, as compared with initial reading of 0.2 percent, and personal spending growth at 0.5 percent, as compared with the earlier reading of 0.4 percent. The personal saving rate rose from June’s 5.5 percent to 5.7 percent.

Meanwhile, headline inflation of the U.S. dropped to 0.8 percent year-on-year from June’s 0.9 percent. Core inflation, on the other hand, remained stable at 1.6 percent. Energy and food, which dropped 1.8 percent and 0.1 percent respectively, were a drag on the overall PCE. Food prices continued with the weakness seen in recent months; however, energy prices showed renewed softness following four straight months of rises.

The latest drop in oil prices implies that the support for headline PCE inflation from energy prices might not be forthcoming in the coming months, said Barclays in a research report.

“We remain of the view that services inflation will continue to be firm, but some of its strength will likely be offset by the other components of the PCE basket, leading overall inflation to increase at a moderate pace”, added Barclays.

The report shows that the second half of the year has begun on a good note. Along with upward revisions to the June data and strong income growth, personal consumption is on the path for 3.3 percent growth in the third quarter, said TD Economics in a research note. This builds on the account of solid consumer spending leading economic activity higher. Meanwhile, spending is expected to continue increasing in the coming months with a sturdy savings buffer.

“For a data-dependent Federal Reserve, the strength in real income and spending growth should offset the weak inflation reading. As long as job growth holds up and wages continue to move higher, the Fed should have all the evidence it needs to move forward with a rate hike this calendar year”, added TD Economics.