U.S. Personal Income Falls Precipitously in July

Daily Forex Fundamentals | Written by TD Bank Financial Group | Aug 29 08 14:24 GMT |

* U.S. personal income dropped a whopping 0.7% M/M in July, compared to market consensus for a more moderate 0.2% M/M fall.
* Despite the decline in income, personal spending rose in line with expectations at 0.2% M/M.
* In terms of inflation, the core PCE deflator rose by 0.3% M/M, in line with expectations, bringing the annual rate of price inflation to 2.4% Y/Y.

U.S. personal income dropped 0.7% M/M in July, following the meagre 0.1% M/M gain in June. The decline was much worse than the 0.2% M/M drop expected by the markets, and was the first time since August 2005 that personal income in the U.S has fallen. To put this in perspective, most of the decline in income was mostly due to the fact that income was boosted in the second quarter by the fiscal stimulus package, and is now unwinding. Despite the drop in July, personal income remains a rather healthy 4.2% higher than their July 2007 levels. On a real basis, personal disposable income declined by a rather massive 1.7% M/M.

Personal spending during the month eked out a meagre 0.2% M/M gain (in line with market consensus), following the rather healthy 0.6% M/M gain in June, and is 5.3% Y/Y above its July 2007 level. Given that spending operates with a lag, we expect to see this indicator decline in the coming months just as income already has. Spending on big ticket items posted a dramatic 1.5% M/M drop, while spending on non-durables (up 0.3% M/M) and services (up 0.5% M/M) posted modest gains. In real terms, however, personal spending fell 0.4% M/M in July and is only up 0.7% Y/Y.

In terms of inflation, the core PCE deflator rose by 0.3% M/M, in line with the market consensus, with the annual rate of core inflation increasing marginally to 2.4% Y/Y from 2.3% Y/Y in June. The 3-month and 6-month annualised trend in core inflation also climbed higher, rising to 2.8% Y/Y (from 2.3% Y/Y) and 2.4% Y/Y (from 2.3% Y/Y), respectively.

On balance, the report is certainly consistent with the growing perception that as the impact of the tax stimulus package wane, U.S. personal spending and income will likely moderate in the coming months. Indeed, with the consumers continuing to be squeezed by the unrelenting demise in the labour market and high gas prices, and household wealth being consistently eroded by declining home prices, U.S. economic activity (which is powered by consumer spending) is expected to moderate significantly in the coming quarters. The risk in this report is that core inflation has remained uncomfortably high, suggesting some amount of pass-through from commodity prices.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.