August 31, 2023

Personal consumption expenditures climbed 0.8% in July after having risen 0.6% in June. The consumer is still willing to spend despite worries about inflation and the pace of Fed tightening.

What we are really interested in is “real” or inflation-adjusted spending.  That is what goes into the GDP calculation.  After adjusting for inflation real consumption spending rose 0.6% in July after gaining 0.4% in June.  In the past year real spending has risen 3.0%. The consumer’s willingness to spend had been slowing down somewhat because his or her purchasing power had been eroded to some extent by inflation, but in recent months it has quickened to a solid 3.0% pace.

Personal  income rose 0.2% in July after climbing 0.3% in June.  The growth in income is being fueled by growth in wages which climbed 0.4% in July after rising 0.6% in June.  Firms are under worker pressure to raise wages (given that average hourly earnings in real terms had been falling for two years).  As a result, wages have risen 4.7% in the past year.

Real disposable income — what is left after paying taxes and adjusted for inflation — had been declining steadily through the middle of last year as inflation more than offset the increase in wages.  However, it has stopped falling.  It has risen steadily for the past year.  Real disposable income rose 0.2% in July after having been unchanged in June.  In the past year real disposable income has risen 3.8%.  That is sizable enough to allow consumers to keep spending at a moderate pace in the months ahead.  Workers and unions are pushing for higher wages to regain some of the real wages lost when the inflation rate was rising so quickly.  Thus, we expect wage growth to continue to grow fairly rapidly.

The savings rate declined 0.8% in July to 3.5% after falling 0.4% in June.  Consumers are still saving less of their paycheck each month than what they have done historically.  In the 10-years prior to the 2020 recession the savings rate averaged 7.0%.  However, with real disposable income now rising, consumers may be able to save slightly more of their paychecks in the months ahead than they are currently.

Consumers are spending, but are beginning to struggle. To maintain their pace of spending they are beginning to run up their credit card bills.  That is OK for a while because they have very little debt in relation to income currently, but that is not a sustainable situation.

Thus far the additional debt has not been a problem.  If that were the case, delinquency rates on consumer debt should have begun to rise.  That is not yet the case.

We expect GDP to rise 2.7% in the third quarter and 1.6% in the fourth quarter.    Still low real interest rates, steady job gains, and significant wage gains will provide enough fuel to keep the economy going for some time to come.

Stephen Slifer


Charleston, SC