June 25, 2021 | 09:20
U.S. Personal Spending: Not So Good(s)
Pausing for breath, American consumers pulled back in May, as ebbing demand for goods more than offset a pickup in services spending. Personal spending was flat in the month, but revised up to a 0.9% advance in April. Real spending fell 0.4% in May, which was weaker than expected, but the miss was more than offset by solid upward revisions to the prior two months (0.3% and 4.4%). This leaves real spending 1.9% above pre-pandemic levels, and, assuming a modest advance in June, will keep it on track for a near 11% annualized gain in Q2.
Spending is clearly rotating from goods to services as more states fully re-open restaurant dining and in-person entertainment (with New York and California now taking final steps as of mid-June). Real goods spending fell 2.0% in May after a modest retreat in April, while real services spending rose 0.4%, moderating from the pace of the prior two months, and still down 4.2% from February 2020.
Personal income fell 2.0% in May amid the further unwinding of March's stimulus payments and a decline in UI benefit payouts. But worker compensation rose 0.7% after back-to-back increases of 0.9%, and is now up a solid 4.8% from pre-virus levels.
The saving rate slid further to 12.4%, though the $2.3 increase in the level of saving is still nearly double the norm prior to the pandemic, adding to the massive horde accumulated during the crisis (now well above $2 trillion). This will go a long way to supporting pent-up demand for services.
Core PCE prices bounced another 0.5% in the month, only slightly less than expected, raising the yearly rate to 3.4%, the highest since 1992. The 3-month annualized rate is a blistering 6.6%, though the 2-year rate is a more moderate 2.2%. We expect a portion of the recent price pressure to stick, keeping the core rate in the high-3s later this year, before drifting down to 2 1/2% later next year.
Bottom Line: With ample savings and rising employment, American consumers are far from tapped out, but waning demand for goods will act as a headwind even as services spending picks up. Q2 will be the high-water mark for spending and GDP growth, though the second half of the year should remain solid.