Takeaways from Today’s U.S. Personal Income Report

Personal income beat estimates with a May drop of “just” -2.0%, after a -13.1% April income pull-back, as we further unwound the stimulus-fueled 20.9% March surge. A flat consumption figure was disappointing, though the significance of the undershoot was diminished by boosts in April to 0.9% from 0.5%, and in March to 5.0% from 4.7%.

Real consumption fell -0.4% in May after gains of 0.3% (was -0.1%) in April and 4.4% (was 4.1%) in March. We saw upward income and consumption revisions in Q1 as implied in the last GDP report. We saw a May savings rate drop to 12.4% from 14.5% (was 14.9%) in April and a 27.6% (was 27.7%) March peak. We left our Q2 GDP estimate at 7.8%, after yesterday’s 6.4% Q1 gain.

  • Income fell -2.0% and consumption was flat, after respective April swings of -13.1% and 0.9% (was 0.5%).
  • Real consumption fell -0.4%, after a 0.3% (was -0.1%) April gain.
  • Compensation increased 0.7% in May, after April’s 0.9% gain, with wage and salary income up 0.8%, following a 1.0% April gain.
  • Disposable income declined -2.3% after the -14.6% drop in April.
  • The PCE chain price headline rose 0.4% in May, and the core measure rose 0.5%.
  • We saw a surge in the y/y chain price gauge to a 13-year high of 3.9% from 3.6% (was 3.6%), while the y/y core rose to a 29-year high of 3.4% from 3.1% (was 3.1%).

Overall, stronger than expected income but undershoots in consumption and a higher than expected savings rate had a neutral impact on our outlook for GDP growth, while the inflation undershoot provides the Fed with a little more elbow room to delay tapering.

The March income surge and April-May pullback reflected the impact of the last stimulus package, leaving a gyration that was much bigger than the January-February swings from the Christmas stimulus package, and twice as big as last year’s April surge with the CARES Act.

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For quarterly income growth, we saw upwardly-revised Q1 rates of 60.1% (was 59.7%) for the headline and 68.0% (was 67.7%) for disposable income, after respective Q4 rates of -4.0% and -6.2%.

We saw a May savings rate drop to 12.4% from 14.5% (was 14.9%) in April and a 27.6% (was 27.7%) March peak, versus prior stimulus peaks of 20.6% (was 20.6%) in January of 2021 and 33.7% in April of 2020.

On a quarterly basis, the savings rate surged to 21.5% (was 21.4%) in Q1 from 13.6% in Q4, and we expect a pull-back to 12.5X% in Q2 and 9.8X% in Q3.

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The 0.7% May compensation gain undershot the combined increases of 0.5% for hours-worked and 0.5% for hourly earnings in the jobs report. The “current transfer receipts” income component fell -11.7%, following the -41.2% (was -41.4%) April drop but 95.1% (was 95.2%) March surge.

We left our Q2 GDP growth estimate at 7.8%, after yesterday’s reported 6.4% Q1 gain. We left our Q2 real consumption growth estimate at 10.2% after yesterday’s reported 11.4% Q1 pace.

The 0.4% May PCE chain price rise rounded from 0.449%, versus the 0.644% CPI headline rise. The y/y PCE chain price index surged to 13-year high of 3.9% from 3.6%.

The 0.5% May “core” PCE chain price gain rounded from 0.481%, versus a 0.737% CPI “core” price rise. The “core” y/y PCE chain price index rose to a 29-year high of 3.4% from 3.1% (was 3.1%).

ABS REPORT

The May undershoots for both the headline and core chain price figures will tap down market fears about 2021 firming in monthly price gains, alongside the well-anticipated climb in the y/y measures due to base effects.

The headline and core PCE y/y gains likely peaked in May, and we now expect a gradual y/y unwind into Q4 to respective rates of around 3.6% and 3.2%.

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