US Q3 GDP tracking 2.6% after July personal income and spending

Personal income grew 0.4% m/m in July, in line with expectations as solid wage and salary gains (0.5% m/m, previous: 0.2%) continued to propel household income growth. Personal spending advanced 0.3% m/m in nominal terms, a bit below expectations (forecast/consensus: 0.4%) as June data were revised higher (0.3% m/m, initial: 0.2%). The savings rate moved up two-tenths in July to 4.9%, as real disposable incomes grew at the fastest rate since January (0.4% m/m, previous: 0.2%). 

"PCE price inflation came in line with and consensus expectations in July, with prices rising at a modest pace. Headline PCE rose 0.1% m/m (0.084% unrounded), as both core and non-core components rose moderately. Core PCE increased 0.1% m/m (0.072% unrounded), in line with the soft trend since the start of the year. Food prices rose 0.2% m/m; over the past two months the rate of food inflation has reversed the downward trend established for most of Q1 and Q2. The energy component was up 0.1% m/m, pausing after two strong monthly increases and has yet to reflect the recent drop in energy futures prices. We expect this component to soften further over the coming two months", notes Barclays.

Compared with a year ago, headline PCE was up 0.3% and core PCE was up 1.2%, both showing soft price pressures. PCE expected to increase at a moderate pace from here, reaching 1.6% y/y by January 2016. However, recent headwinds from lower commodity prices and a strong dollar are likely to interrupt this upward trend in H1 2016 and lead to a small decline in the y/y rate of core PCE. As core prices rise modestly and the drag from declining energy prices wanes, headline PCE also is expected  to edge higher to 0.7% by the end of 2015 and 2.0% by the end of 2016.

Adjusting for these price effects, real personal spending was up 0.2% m/m (previous: 0.0%) in July, below our and consensus expectations of a 0.3% m/m rise. Real goods consumption grew 0.5% m/m (previous: -0.2%) and services spending rose a modest 0.1% m/m (previous: 0.2%). This morning's release also includes the revised monthly pattern of real consumption that was incorporated in the quarterly profile of yesterday's second estimate of Q2 GDP.

"The details here show that an upward revision to real consumption in May accompanied the slower-than-expected PCE growth in July. As a result, our Q3 tracking estimate of real consumption growth fell to 2.8% from 3.1%. This lowered our Q3 GDP tracking estimate by two-tenths to 2.6%",says Barclays.