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PNC Senior Economist Bill Adams: Consumer Spending Continues to Lead the Recovery;

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income growth solid after looking through the impact of stimulus

Personal income rose 0.1% in June after a 2.2% decline in May, revised from 2.0% in the prior release. The wild volatility of personal income since the pandemic struck is due to the timing of support payments and their withdrawal; personal current transfer receipts, which include these and other categories of government support, fell 2.0% in June. Personal income less transfer receipts rose a solid 0.7% in June after increases of 0.6% in May, 0.7% in April, and 1.2% in March. Personal current taxes rose 1.2% in June, making disposable personal income flat on the month. Personal consumption expenditures rose 1.0% in June after falling 0.1% in May.

The price index for personal consumption expenditures rose 0.5% in June, unchanged from May and down from 0.6% in March and April. From a year earlier, the price index of personal consumption expenditures rose 4.0%, unchanged from May. This is the Fed’s preferred measure of inflation, and includes a broader basket of goods and services than the CPI (among other differences, the CPI measures direct consumer spending, while the PCE basket includes spending on behalf of consumers by public and private health insurers). Inflation continues to run hot due to supply chain disruptions, rapid shifts in consumer demand, and other legacies of the pandemic and measures to contain it. Inflation should settle down in coming months as the pass-through of declines in prices like used cars (auction prices fell in May and June) and lumber (prices on the commodity exchange are down 60+% from the May peak) flow through to the prices consumers pay.

Adjusting for PCE inflation, real personal disposable income fell 0.5% on the month in June. Real personal consumption expenditures rose 0.5% in June, with real spending on durable goods down 2.5%, real spending on nondurable goods up 1.2%, and real spending on services up 0.8%.

Consumer spending continues to lead the economic recovery. While real personal income less transfer receipts was still 0.4% below its February 2020 level in June, the huge amount of fiscal support received by households since the pandemic began has kept consumer expenditures red-hot. In June, consumers continued to shift their spending away from durable goods and the stay-at-home economy and toward services and the venture-out economy. As services spending rises further in coming months, it will fuel rapid job gains, and further increases in personal income and spending power.

This release of personal income made downward revisions to personal income and expenditures over the last five years, which translated into modest changes for the path of the personal saving rate. The BEA summarizes, “The personal saving rate was revised up 0.1 percentage point to 7.0 percent in 2016; revised up 0.1 percentage point to 7.3 percent in 2017; revised down 0.2 percentage point to 7.6 percent in 2018; revised up 0.1 percentage point to 7.6 percent in 2019; and revised up 0.2 percentage point to 16.6 percent in 2020.” The big picture for the saving rate is unchanged: It was higher pre-pandemic than before the Great Recession, contributing to healthy household finances before the pandemic hit. The saving rate surged in 2020 due to stimulus checks, unemployment benefits, and forced savings, and has come down since as the economy has begun to normalize. Consumers have very strong balance sheets coming out of the pandemic, which will fuel strong consumer spending and economic growth in the next few years.

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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