The latest numbers on U.S. personal income and expenditures show that consumption has been outpacing income. There are limits to how long consumption and income can go their separate ways.

In Focus - Still Buying

The latest U.S. data on July personal income and expenditures showed that, in real terms, consumption of durable goods had risen by 1.4% over June. Consumption of non-durable goods (those that are expected to last 3 years or less) rose 0.4%. Consumption of services (the biggest category) rose 0.7%

And real disposable income fell 0.2%.

As the chart shows, there was nothing strange about increasing consumption. It normalizes the levels to the eve of the pandemic recession, with February 2020=100. Before then, the clustered lines showed that the swings in consumption and income were nowhere near as wild as what came next.

Whereas services consumption fell sharply at first, it commenced a steady rise that is ongoing. In July it was up 5.3% above the February 2020 level. After several recent months of notable increases, durable goods consumption was up a cumulative 31.1% over the pre-pandemic level, with non-durable goods consumption up 11.7%.

Goods took a different path. An initial dip, then a very sharp increase to a roughly Spring 2021 peak, then a partial pullback to Summer 2022. Even then, goods consumption was still well above pre-pandemic levels and it has risen since.

How can spending be rising so markedly, while disposable personal income is up only 2.9% from its pre-pandemic level? One obvious answer is that consumers don’t need to match income to spending each month; they can save or borrow.

From Spring 2021 through Spring 2022, real disposable personal income shot up as stimulus money coursed through the economy. Sure, durable goods consumption grew faster, but even at elevated 2021 and 2022 levels, durable goods made up only 16.2% of personal consumption expenditure. The elevated disposable income pumped up saving.

But as disposable income eased off, consumption has held steady (goods) or risen notably services. The net result was a personal savings rate of 3.5% in July, down from 4.3% in June. To put that number in some perspective, across the five years leading up to the pandemic recession, the personal savings rate ranged from a low of 6.3% to a high of 9.5% with an average rate of 7.7%.

A 3.5% rate is not unprecedented. We saw similar or lower levels in the latter half of 2022. And such low levels were more common in the 2000’s, in the leadup to the Global Financial Crisis. But those are the only times the personal savings rate has been that low since the series began in 1959.

The question is what these trends portend. A study by researchers at the San Francisco Federal Reserve found that household excess saving had peaked at $2.1 trillion during the pandemic stimulus era. By March 2023, they estimated that $500 million remained. By June, $190 million. Before these July income and consumption numbers came out, the authors predicted that the excess savings were likely to be depleted by the third quarter of this year.

Of course, consumers could keep going for a time by borrowing, but rising real interest rates have made that an increasingly costly proposition. Barring an unexpected jolt in disposable income, this suggests a pullback in consumption lies ahead.

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Economic Developments

U.S. Q2 real GDP was revised down to 2.1% from 2.4% quarter-on-quarter growth, after an increase of 2.0% in Q1. The acceleration was attributed to a 6.1% rise in non-residential fixed investment, which was also updated from 7.7%. Growth in final sales to private domestic purchasers was 2.1%, lower than initial estimates of 2.3%.

U.S. 12-month trimmed-mean PCE inflation ticked down to 4.1% in July from 4.2%, recording a new low since May 2022. Another key rate in Fed decision-making, the core PCE inflation (which excludes food and energy) went up to an annual rate of 4.2% in July from 4.1%, driven by a year-on-year increase of 5.2% in services, offset by a decrease of 0.8% in durable goods and 0.2% in nondurable goods.

Advance wholesale inventories in the U.S. fell 0.1% from June to July but the level was still 0.5% higher than July 2022. A month-on-month decrease of 0.3% in inventories of durable goods was offset by a 0.2% increase in non-durable goods inventories. However, inventories for durable goods were 5.2% above and non-durable goods were 6.3% below readings from July 2022. These numbers are adjusted for seasonality and trading day differences, but not for inflation.

U.S. job quits rate declined to 2.3% in July, down from 2.4% in June and marking the second straight month of decreases and the lowest reading since January 2021. Job openings went down to 5.3%, the lowest rate since February 2021. The hires rate was 3.7%, a record low since April 2020. These declines suggest weakening worker confidence.

U.S. unemployment rose to 3.8% in August from 3.5%, marking the highest rate since February 2022. The employment-population ratio, however, stayed the same at 60.4%. Gains in construction employment were offset by decreases in transportation and warehousing.

U.K. annual volume GDP growth was revised up 1.1% to an increase of 8.7% in 2021 and up 0.6% to a fall of 10.4% in 2020, meaning that GDP surpassed pre-pandemic levels by 0.6% in Q4 of 2021 after initial estimates of being 1.2% below. The revisions placed the U.K.’s recovery ahead of other major European economies.

Euro area headline inflation stayed at an annual rate of 5.3% from July to August. Energy prices fell 3.3%, slower than July’s reading of 6.1%, while fresh food inflation slowed to 7.8% from 9.2%. Core inflation, which excludes energy, food, alcohol and tobacco fell to 5.3% from 5.5%, still well-above ECB’s target of 2%.

• Spanish headline inflation accelerated to an annual rate of 2.6% in August from 2.3% while core inflation, which takes out food and energy, eased to 6.1% from 6.2%.

• German headline inflation slowed slightly to an annual rate of 6.1% in August, for the second consecutive month. Core inflation, which excludes food and energy, remained at 5.5%.

• French headline inflation rose to an annual rate of 4.8% in August from 4.3% but was still lower than the reading of 5.9% in August 2022.

• Italian headline inflation eased to an annual rate of 5.5% in August from 5.9%, and core inflation, which strips out fresh food and energy, also slowed to 4.8% from 5.2%.

Euro area unemployment remained at 6.4% in July, continuing a historic low. The Euro area’s biggest economies, Germany, Italy, France and Spain all stayed within 0.1% of its reading from June.

Euro area economic sentiment decreased 1.2 points to 93.3 in August, recording the fourth consecutive month of declines. Consumer confidence fell 0.9 points for the first time since September 2022. Retail trade confidence and construction confidence also weakened, by 0.6 points and by 1.1 points, respectively.

German consumer confidence fell 0.9 points to -25.5 for GfK’s September forecast. Weakening confidence was attributed to rising prices and declining income expectations.

India’s GDP expanded at an annual rate of 7.8% in the April-June quarter of 2023, the fastest growth in a year. The expansion was attributed to an increase of 12.2% in financial, real estate and professional services and a rise of 9.2% in trade, hotels, transport, communication and services related to broadcasting.

Trade

• U.S. goods exports fell 0.1% in June, driven by a 1.2% decrease in industrial supplies and 1.8% decline in consumer goods, offset by a 1.5% increase in capital goods. Goods imports fell 1.2%, led by a 3.9% decrease in industrial goods. Exports to Canada, the U.S.’s biggest export destination, fell 2% while exports to Mexico grew 2%. Exports to China decreased 1.6% and imports fell further by 6.4%. Imports from Mexico, the U.S.’s largest import source, decreased more slightly by 0.3%.

• Mexico goods exports increased at an annual rate of 2.9% in July, with a 5.7% rise in non-oil goods. Non-oil exports to the U.S. grew 6.9%, and in particular, autos exports to the U.S. saw a 37.5% increase.

• Korean exports shrank 8.4% year-on-year in August, in large part due to the base effect from August 2022’s record high. Autos exports increased 28.7%, recording the 14th straight month of expansion, but was offset by a fall of 20.6% in semiconductor exports and a decline of 54.6% in computers. Exports to the U.S. and EU reached historic August monthly highs while exports to China and ASEAN declined.

Political Developments

U.S. Secretary of Commerce Gina Raimondo visited China for discussions on their bilateral relationship. She focused on the importance of communication and cooperation in addressing climate change and the Fentanyl crisis while reaffirming U.S. commitment to ensuring national security and fairness to U.S. businesses.

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