August Data Shows Consumers Earn More, Spend Less

All eyes were on the latest Personal Consumption Expenditures data Friday (Aug. 29) as a read-across for when the Federal Reserve may cut interest rates.

But the information also details pressures on consumers navigating a balancing act in terms of spending and saving: While incomes, and particularly disposable income, are on the rise, spending is outpacing that gain. But when adjusting for inflation, there’s actually been a paring back of spending; not a decline, but a deceleration.

Estimates released today by the U.S. Bureau of Economic Analysis reveal personal incomes increased 0.4% at a seasonally adjusted monthly rate in July, accelerating from the 0.3% gain recorded in June. Disposable personal income, i.e. less personal current taxes, also rose 0.4%, also improving from last month’s 0.3% pace.

Wages are Trending Up

The July increase in personal income was driven mainly by wages and salaries. Private wages and salaries grew 0.6% and accounted for 74% of the overall gains in the period.

Personal consumption expenditures (PCE) expanded 0.5% in July, outpacing the growth in disposable income. Services accounted for a $60.2 billion increase, while goods added $48.7 billion. Yet, goods expenditures, particularly durables, accelerated relative to June, growing by 0.8% (1.9% for durables) after a 0.4 % rise in the month prior (-0.8% for durables).

The PCE price index, the Federal Reserve’s preferred inflation measure, increased 0.2% in July and 2.6% year-over-year, unchanged from June’s 12-month rate. Prices for services have grown much faster than those of goods over the past year, at a pace of 3.6% versus 0.5% for the former. Core PCE, which excludes food and energy, rose 0.3% in July and 2.9% from one year ago, slightly faster than June’s 2.8% pace.

When netting out the effect of higher prices, the trend in recent months is of decelerating expenditures, close to leveling up, with the pace of income increases, which means that the “gap” between the two metrics is not as wide as it once was, and thus households are taking at least some steps to conserve cash.

Narrowing the Gap

Over the last 12 months, personal consumption expenditures have increased 2.1% in real terms, while disposable personal income has risen by 2%. July marked the seventh consecutive month in which real expenditure growth outpaced income growth on a yearlong perspective, although the gap has narrowed: consumption grew 2.2% in June while disposable income grew 1.7%. The same registers were seen in May.

The personal saving rate, or personal saving as a percentage of disposable personal income, stood at 4.4% in July, unchanged from June. The path of the savings rate may prove indicative of the state of consumer worries: it stands below the April peak (5%), but above December’s 3.5% level.

The move to save comes against a backdrop where, as we reported earlier this week, inflation expectations rose for the first time in three months during the same month reflected in the PCE data. Inflation expectations as estimated by the Conference Board climbed to 6.2% from 5.7% in July, but below April’s peak of 7%. Concerns about tariffs and high prices, especially for food and groceries, intensified.

And on Friday (Aug. 29), University of Michigan released the final data for their August Consumer Sentiment Survey, confirming a decline in sentiment of 5.7% as measured this month from July. The August decrease was pervasive across income and age groups. Sentiment now stands 14% below its own standing a year prior. Year-ahead inflation expectations moved up again after two consecutive drops, from 4.5% last month to 4.8% this month.