Nominal personal income came in at 0.2% relative to the 0.3% expected rate, and is now 3.4% higher than a year ago. Meanwhile, real personal disposable income increased by 0.1% in the month, following an unchanged reading in May; it was up 3.1% annually. Consumer spending was 0.4% higher, following a similar reading in nominal dollars; this was greater than the 0.3% forecast increase. Real personal spending was 0.3% higher. Spending in the month (in real terms) was driven by increases in durable goods expenditure (0.4%), spending on nondurables rose by 0.3%, and spending on services by 0.3%. The report incorporates annual revision for the last three years.
Private sector wages and salaries (roughly 45% of personal income) were up 0.3% in the month (current dollars), following a 0.2% increase in May. Meanwhile, government sector wages and salaries were 0.2% higher; they are now 3.0% higher annually. This annual rate of change is improving, but still far below the historical median rate of 6.4% (1960-2014). Private sector wages and salaries increased 3.3% over the last year (historical median was also 1960-2016 = 6.4%). Lastly, both the PCE core price index and the headline index were up by 0.1%. The annual change for the core rate was 0.9% and 1.6% for the headline rate (still well below the Fed’s target).
The tightening in the labour market is only tentatively starting to be reflected in a number of measures we track with regard to wage inflation (e.g., the Atlanta Fed’s wage tracker index and average hourly earnings), although evidence from perhaps the best measure of compensation costs pressures—the employment cost index—still shows compensation gains to be relatively subdued. The reality is that consumer spending has been the key driver of economic growth, as last week’s GDP report demonstrated, yet consumers are also not taking out much in the way of debt. This is in large part because their fingers were badly burnt during the last crisis and banks now exhibit tighter lending standards. However, it is also the case that both millennials and baby boomers (which account for more than 50% of the current population) are less keen on leveraging themselves up, mainly because they are either downsizing from larger homes and/or renting, whilst also following an asset light model, similar to many companies. As a result, with slower growth in debt, seemingly less demand is being pulled forward, and less consumption smoothing is taking place. This, in turn, means that consumer spending is likely to be that much choppier (as seems to currently be the case with respect to the behaviour of retail sales). As far as the Fed is concerned, it will find this encouraging, but it is still in no hurry to raise rates any time soon.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.