U.S. personal income growth decelerates in July, spending rises sharply

U.S. personal income growth weakened in the month of July. It slowed down to 0.1 percent from June’s 0.5 percent, as compared with consensus expectations of a rise of 0.3 percent. Excluding price movements, personal income shrank 0.1 percent in July. This was the first contraction in real income since September 2018.

On the contrary, spending rose sharply. In nominal terms consumption grew 0.6 percent and on a real basis growth came in at 0.4 percent, surpassing market expectations by 0.1 percentage points in both cases.

On the prices side, the personal consumption price deflator rose 0.2 percent sequentially and 1.4 percent year-on-year, a bit stronger than the June readings of 0.1 percent. Nevertheless, excluding food and energy, price inflation remained largely unchanged from June at 0.2 percent sequentially and 1.6 percent year-on-year. Goods continued to be in deflation territory at -0.5 percent year-on-year, while services price inflation remained stable at 2.2 percent year-on-year.

“The American consumer remains confident and is supported by a strong labor market. Both factors should continue to support healthy consumption growth through the remainder of the quarter”, said TD Economics in a research report.

Nevertheless, the softness in personal income growth is something to watch out for. Decelerating manufacturing activity, softer investment and weakening global growth is translating to less hours worked which is possibly pulling down income growth. If this continues it might soften consumption, thereby destabilizing the backbone of the U.S. growth.

“The Fed is well aware of this fact and will probably move to provide further monetary stimulus in September. Moreover, given that the headwinds — weakening manufacturing activity, elevated trade tensions, and softening global growth — will not dissipate so quickly, further monetary support will likely be required in the months ahead”, added TD Economics.