U.S. Personal Consumer Spending Despite Drop in Personal Income

Daily Forex Fundamentals | Written by RBC Financial Group | Aug 29 08 14:15 GMT |

Personal consumer expenditure (PCE) rose once again in July, although by a modest 0.2%, down from gains of 0.6% in June and 0.8% in May. The slowdown was in line with market expectations and, in large part, reflects the waning effect of the tax rebate cheques. The declining impact of the fiscal stimulus is also evident in the personal income numbers, which jumped 1.8% higher in May, rose only 0.1% in June and were reported this morning as declining 0.7% in July. The wage and salaries component, which was less affected by the tax rebate cheques, rose 0.3% in July following gains of 0.2% in June and 0.3% in May. The overall increase largely reflected gain for non-durables (+0.3%) and for services (+0.5%). This offset a 1.5% decline in durables, reflecting weakening auto sales in the month. However, all of the upward strength reflected higher prices as the volume of overall consumer spending fell 0.4% in July and compares to a drop of 0.1% in June and a 0.3% gain in May. The continued strength in energy and food prices was evident in the 0.6% rise in the overall PCE price index in the month, which sent the year-over-year rate up to 4.5% from 4% in June. On a core basis, prices were up a more moderate 0.3%, which sent the annual rate up to 2.4% from 2.3% in June and 2.2% in May. The decline in real consumer spending in July suggests that support from fiscal policy is starting to wane and that negative factors such as declining employment and falling net worth are starting to have a more dominant impact. This is clearly a worrying development from the Fed's point of view and will emphasize the transitory nature of the strength evident in yesterday's stronger-than-expected second-quarter GDP numbers indicating annualized growth of 3.3%. To temper the weakening in growth going forward, the Fed is expected to keep policy relatively accommodative despite indications that trend inflation is creeping higher as evidenced in today's number for core PCE. Our forecast assumes that Fed funds will be maintained at its current stimulative 2% through the first half of next year. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.