Yesterday’s personal income and spending report for May matched expectations on the income side of the ledger but fell short of the consensus forecast for consumption. Some analysts warn that the surprisingly weak growth rate for spending last month (+0.2% vs. the consensus forecast of +0.4%) casts a shadow over the projected snapback in second-quarter GDP. But focusing on the monthly income and spending data can be misleading–especially if we’re looking at one monthly release. By contrast, the year-over-year changes offer a more reliable measure of the trend and by that yardstick the latest release offers another round of modest encouragement.
In fact, spending and income data for the past three months through May have remained stable on a year-over-year basis, posting gains in the mid-3% range (in nominal terms). Personal consumption expenditures (PCE) increased 3.7% for the year through last month—the second-fastest increase since December 2012. Meantime, the rate of annual growth for disposable personal income (DPI)—household income less taxes–inched higher in May, rising 3.7%–a bit faster than April’s pace and the strongest gain since January.
More importantly, private-sector wages—the dominant slice of personal income—continues to increase by more than 4% on a year-over-year basis. Last month, wages increased 4.3% vs. a year ago—the third straight month of annual increases north of 4%.
Nominal wage growth at current levels isn’t especially strong, but the fact that it’s stable and reflects a respectable if unspectacular rise suggests that this trend will support higher consumer spending for the near term.
The real (inflation-adjusted) data also show moderately steady growth. Real PCE and DPI are each rising at around 2% a year through May, or in line with the past several months. In turn, 2% year-over-year increases for real PCE and DPI imply something comparable for the annual increase in real GDP. So, what’s the problem? Looking at monthly and quarterly comparisons is a bit less encouraging, as Chris Low, chief economist at FTN, explains via RTT News:
“A month ago, strong consumer spending was the reason not to worry about weak Q1 GDP growth. Spending was up 3% in Q1 and was expected to be as strong in Q2. With a strong consumer, GDP was a sure bet to quickly revert to a rising track.”
“The May data and Jan-April revisions tell a very different story,” he added. “Consumption rose just 1.0% in Q1 and is tracking 1.25% in Q2. Unless June data are strong, we’ll be lucky to hit 2% GDP in the second quarter.”
Low subsequently suggested that GDP growth for the year could be as weak as 1 percent, which he said would demand a rethink by the Federal Reserve and should have investors questioning the 6 percent year-to-date rise in stocks.
Such pessimism is premature, although not entirely beyond the pale. For the moment, however, there’s a reasonable case for expecting that the next Q2 GDP report will reflect substantially stronger growth vs. the previous quarter’s hefty slump. The Capital Spectator’s GDP nowcast update from earlier this week points to a 3.3% advance for the April-through-June period (real seasonally adjusted annual rate). But if that upbeat outlook is destined to fall, we’ll probably see the evidence in the next GDP nowcast, which will appear on these pages next month, ahead of the initial Q2 GDP report. Meantime, most of the economic indicators are pointing to ongoing growth, and one modestly disappointing spending report doesn’t alter the big picture.