August 26, 2022
Personal consumption expenditures rose by a smaller than expected 0.1% in July after climbing by a larger-than-expected 1.0% in June. In the past year nominal consumer spending has risen by 8.7% While there are always monthly wiggles, the consumer is still willing to spend despite lots of 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 0.2% in July after having been unchanged in June. In the past year real spending has risen 2.2%. Not bad, The consumer’s willingness to spend is intact, but his or her purchasing power is being eroded by inflation.
Personal income rose 0.2% in July after having jumped 0.7% in June and 0.6% in May. Over the past year personal income has risen 4.6%. The recent gains in income are being driven by the wage component which reflects continued growth in employment combined with rising hourly wages. The wage component of income has risen 0.6% in May, June, and July. Fueled by steady job gains wages and worker pressure to raise wages given that average hourly earnings in real terms have been falling, wages have risen 9.6% in the past year.
But real disposable income — what is left after paying taxes and adjusted for inflation — has been declining steadily since this time last year as inflation more than offset the increase in wages. In July real disposable income rose 0.3% after having declined 0.2% in June. In the past year this series has fallen 3.7%. Falling real earnings are causing workers and unions to push for higher wages to compensate. Thus, we expect wage growth to continue to grow rapidly. Real disposable income may stop falling in the second half of the year if workers are able to secure larger wages at the same time that inflation moderates slightly.
The savings rate was steady at 5.0% in July which is below its long-term average of 7.0%. Consumers are able to save less of their paycheck each month than what they have historically. But they are still saving.
Given the revisions to data for throughout the first half of the year, we expect positive GDP growth rate of about 2.0% in the second half of the year which would counter the GDP declines registered in the first two quarters. We look for 0.3% GDP growth in 2022.