EconoFACTS

July 28, 2023 | 09:04

U.S. Personal Spending: The Real Deal

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

U.S. consumers ramped up spending in early summer, notably on autos and other goods, seemingly thumbing their nose at rising interest rates. Personal spending rose 0.5% in June, while real spending accelerated 0.4%, a bit more than expected, following an upwardly-revised 0.1% advance the prior month. While real consumer spending growth moderated to 1.6% annualized in Q2 from 4.2% in Q1, there's every reason to believe it will quicken in Q3, with support from rising real wages, rallying equity markets, and surging confidence. We are upping our economic growth forecast for the second half of the year. In June, real spending on goods jumped 0.9%, led by autos and recreational goods and vehicles. Meantime, real services spending edged up 0.1%, sticking to the subdued course of the past three months.

Personal income came in on the light side, rising 0.3%, though the prior month's advance was bumped up to 0.5%. The saving rate fell back to 4.3%, indicating that households continue to tap a rich vein of excess savings to support spending.

Also supporting demand is moderating inflation. Both headline and core prices rose 0.2%, as expected, chopping their yearly rates to 3.0% and 4.1%, respectively. The former is now in line with the CPI rate, while the latter has finally broken out of this year's narrow 4.5%-to-4.7% range. A little more disappointing is that 'supercore' prices, which strip out energy and rents from services, also advanced 0.2%. The CPI proxy had indicated a softer print. Still, the yearly rate fell to 4.1% from 4.5%, and the 3-month annualized rate is down to 3.3% from 3.7%, the lowest since last summer.

Wage growth also appears to be simmering down a bit. The Employment Cost Index rose 1.0% (or 4.1% annualized) in Q2, a little less than the consensus view. This chopped the yearly rate to a five-quarter low of 4.5% and down from last year’s 32-year high of 5.1%, though it’s likely still a source of concern for the Fed.

Bottom Line: A data-dependent Fed will see mixed results in today's reports. Inflation and labour compensation are moderating, but consumers (and the economy) appear to be picking up steam. Many more reports will be in hand before the September 19-20 policy meeting rolls around; but, for now, we lean toward no further rate hikes, assuming inflation and wage growth continue to calm down.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics

Table 2 - United States — Employment Cost Index

(% change)

Source: BMO Economics, Haver Analytics