U.S. records soft spending and inflation in May, personal income rises strongly

Personal income in the U.S. rises strongly in May. It was up 0.4 percent, a bit more than consensus expectations of a rise of 0.3 percent. Stripping taxes and price changes, real disposable personal income rose strongly by 0.6 percent in May.

Meanwhile, personal spending was subdued. It rose just 0.1 percent, consistent with consensus expectations. In real terms, personal spending also rose by 0.1 percent, driven by a 0.2 percent rise in non-durable goods. Durable goods spending dropped 0.1 percent, while services spending rose 0.1 percent.

Consumer prices dropped 0.1 percent on a sequential basis in May, bringing the year-on-year rate of inflation to just 1.4 percent from April’s 1.7 percent. Core prices, stripping food and energy also rose 0.1 percent sequentially, bringing the year-on-year core price growth to 1.4 percent from the prior 1.5 percent. The personal saving rate rose to 5.5. percent from a downwardly revised 5.1 percent in April.

Spending in the U.S. came in slightly softer in May; however, it follows two months of strong growth. For the second quarter, spending is expected to come in at an annualized growth of 3 percent, marking a return to form for consumer spending growth and raising overall economic growth back above trend, stated TD Economics in a research report.

The upside of a soft inflation is solid real income growth. Real disposable personal income has grown a whopping 4.7 percent in the past three months, the strongest rise in almost two years. This should continue to support strong consumer spending through the second half of this year, noted TD Economics.

In its last Summary of Economic Projections in June, the U.S. Fed lowered its outlook for inflation for 2017. Even this comparatively quiescent forecast is at risk of underperforming given the continued slowdown in inflation. While global central banks have turned increasing hawkish in recent weeks, ongoing misses on the inflation from continue to be the main risk to the rate of monetary policy normalization, added TD Economics.

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