June 25, 2021

Personal consumption expenditures were unchanged in May, but the April and May data were revised upwards.  PCE rose a revised 0.9% in April ( vs. 0.5%) and 5.0% in March (vs.4.7%).  The $1.400 tax refund checks bolstered consumer income and spending in March. Spending slowed to a more normal pace in April and May..

Goods spending has already surpassed its January 2020 high, but spending on services  remains about 1.0% below its pre-pandemic level..  But with the savings rate high at 12.4%  and the economy continuing to re-open consumer spending is bound to climb sharply in the months ahead.  Having said that consumption spending was unchanged in April in nominal terms, but the personal consumption expenditures deflator jumped by 0.4%.  That means that real consumption spending declined 0.4% in May.  Nominal spending should continue to climb in the months ahead, but how large will the increase in inflation be?  Our guess is that going forward real spending will continue to rise at a 3.0-4.0% pace as consumers continue to spend and that inflation gains monthly settle back to 0.2-0.3%.

Personal  income fell 2.0% in May after falling 13.1% in April after having jumped 20.9% in March.  The $1,400 stimulus checks caused transfer payments to surge from $4.2 trillion to $8.2 trillion.  By transfer payments dropped to $4.3 trillion which is closer to normal but still slightly on the high side.  The income drop in May was partially offset by continuing growth in the wage component which rose rose 0.3% in March, April, and May.  Fueled by steady job gains and rising wages it has risen 3.8% in the past six months.

What that means is that real disposable income — what is left after paying taxes and adjusted for inflation — fell 2.8% in May after declining 15.1% in April after having jumped 22.8% in March.  In the past year this series has declined 2.3%, but it should  grow in the months ahead at a rate above its 2.7% average growth for the foreseeable future.

The savings rate surged to 27.7% in March but dropped back to 12.4% by May.  With the savings rate still very high consumer spending will continue at a brisk pace for many months to come.  With the 12.4% savings rate so elevated there is about $1.0 trillion of surplus savings (savings above the normal 7.0% pace).  Those funds are liquid and available for consumers to spend at any time.

We expect GDP growth of 10.0% in Q2.  We expect to see GDP growth for 2021 as a whole of 8.0% as the vaccine gets distributed and consumers feel more comfortable going out to eat and  travel, and as liquid funds from the inflated savings rate get spent.

Stephen Slifer


Charleston, SC