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PNC Chief Economist Gus Faucher: Modest Income Growth in August,

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With Large Consumer Spending Gain; Slower Monthly Inflation

  • Personal income increased 0.2% in August, with consumer spending up 0.8%.
  • Inflation was 0.4% on a monthly basis in August. Inflation has slowed in recent months on a month-over-month basis, although it remains elevated on a year-ago basis.
  • Real (inflation-adjusted) after-tax income was down 0.1% in August, with real spending up 0.8%.
  • Drivers for consumer spending remain positive in the second half of 2021, although the end to expanded unemployment insurance programs will be a drag.
  • The Federal Reserve will start to reduce its purchases of long-term assets in late 2021 but will not increase the federal funds rate until 2023.

Personal income increased 0.2% in August from July, matching the consensus. Labor market income increased 0.4% over the month due to more jobs and higher wages. With taxes up 0.6% in August, disposable (after-tax) income rose 0.1% over the month.

Consumer spending increased 0.8% in August from July. This was better than the consensus expectation for growth of 0.6%. Spending on goods rose 1.2% over the month, with a 2.1% increase in nondurable goods spending more than offsetting a 0.4% decline in durable goods spending. The decline in durable goods spending was due to lower auto sales, as supply-chain problems restricted auto production and inventories. Spending on services rose a solid 0.6% in August, even as the Delta variant became more of a drag on consumer activity over the month. Goods spending is well above its pre-pandemic level, with services spending still somewhat below.

Consumer spending in July was revised lower to a 0.1% decline, from the previously reported 0.3% increase.

With consumer spending up more than disposable personal income, the personal saving rate was 9.4% in August, down from 10.1% in July. The personal saving rate is still well above its pre-pandemic level of around 7%.

The personal consumption expenditures price index rose 0.4% in August from July, the same pace as in July, but slower than 0.5% increases in May and June and 0.6% increases in March and April. The core PCE price index, excluding volatile food and energy prices, rose 0.3% in August, the same rate of core inflation as in July, and down from 0.5% in June and 0.4% in April and May. Monthly inflation, although higher than it was before and during the recession, has slowed in July and August.

On a year-ago basis overall PCE inflation was 4.3% in August, up from 4.2% in July and 4.0% in May and June. Core PCE inflation was 3.6% year-over-year in August, the same pace as in June and July, but up from earlier in 2021. The year-over-year numbers obscure the fact that inflation has actually slowed on a month-to-month basis.

After adjusting for inflation, after-tax income fell 0.3% in August from July, while consumer spending rose 0.8%. Consumer spending growth is running at a better than 4% annualized pace through the first two months of the third quarter, pointing to a solid increase in GDP; consumer spending accounts for about two-thirds of GDP.

Despite the impact of the Delta variant-spending growth for services was much weaker than for goods-consumers continue to purchase more. Households still have more than $2 trillion in excess saving from 2020 and early 2021, when they saved their stimulus checks and had limited opportunities to spend, and the saving rate remains elevated. Other positives for consumer spending in the second half of 2021 are record household wealth, due to rising home values and very high stock prices; extremely low-interest rates; and job and wage gains. A gradual normalization in supply chains should boost auto production and sales. The end of extended and expanded unemployment insurance benefits at the beginning of September will be a drag on income and spending, however. Still, spending growth will remain strong heading into 2022, especially as it appears that coronavirus cases have started to decline.

Inflation, although high, has started to slow on a month-to-month basis. Supply-chain problems have led to higher prices for many goods and some services. But some of those high prices are now starting to fall, and others are increasing at a slower pace. Overall inflation is likely to pick up in September with higher energy prices, but the worst of the acceleration in inflation looks to be over. Inflation will fall on a year-over-year basis later this year and in early 2022 but is set to pick up again later next year as higher labor costs work their way through the economy. Still, the danger of runaway inflation is fading.

The Federal Reserve is looking to achieve average inflation of around 2%. Inflation was below 2% for most of the previous economic expansion and slowed further in early 2020 with the recession. Thus, the central bank is fine with inflation that is temporarily above 2% for a bit. The Fed will announce in early November that it will start to reduce its purchases of long-term assets in early December, putting modest upward pressure on long-term interest rates. But the central bank is unlikely to increase the federal funds rate, its key short-term policy rate, until the first half of 2023, when the labor market has fully recovered from the pandemic.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.

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