Personal income rose 0.5 percent in May, according to the Bureau of Economic Analysis (see first chart). Over the past two and a half years, personal income data has been sharply distorted by lockdown policies that have led to massive layoffs, and government stimulus programs that have skyrocketed transfer payments. As the distortion decreases the personal income trend is moving closer to increasing (see first chart).
Excluding personal transfer payments, personal income rose 0.7 percent in May and 8.3 percent over the last 12 months. It is also significantly above the recent trend line (see first chart).
In real terms (adjusted for price changes), personal income excluding transfers rose 0.1 percent in May, while actual disposable income fell 0.1 percent. In the last twelve months, real income excluding transfers has increased by only 1.8 percent whereas real disposable income has declined by 3.3 percent.
Weak growth for real personal income concerns for real consumer spending outlook. Total personal spending (PCE) rose 0.2 percent in May after rising 0.6 percent in April (see second chart). Among components, sustainable products fell 3.2 percent, while attic-product costs rose 0.7 percent and services spent 0.7 percent month-on-month.
In real terms, PCE fell 0.4 percent (see second chart) because actual sustainable product costs fell 3.5 percent, actual non-sustainable product costs fell 0.6 percent, and actual service costs rose 0.3 percent.
Personal savings increased in May, reaching 5.4 percent of disposable income after a 5.2 percent gain in April. Nevertheless, it is below the pre-epidemic rate of 7.3 percent in December 2019 and at a relatively low rate by historical comparison (see Chart 3).
Price indicators from personal income and expenditure reports are the primary measures followed by the Federal Reserve. The total PCE price index rose 0.6 percent in May as prices of durable-goods rose 0.3 percent, prices of non-durable-goods rose 1.2 percent and prices of services rose 0.4 percent. Excluding food and energy, the PCE price index rose 0.3 percent for the month.
Over the past year, the PCE price index has risen 6.3 percent, the same pace as the previous month but down 6.6 percent in March. The core PCE index, which excludes food and energy prices, rose 4.7 percent from a year earlier, compared to 4.9 percent in April and 5.2 percent in March.
Overall, ongoing disruptions in labor supply and production, material shortages, and logistical and transportation constraints continue to put upward pressure on prices. Moreover, the result of Russia’s aggression in Ukraine and periodic lockdowns in China continue to disrupt global supply chains while an intense policy tightening cycle by the Fed raises the cost of debt. For consumers, rapidly rising prices are hurting real incomes and eroding confidence in the outlook, suggesting a threat to real spending. The outlook for the economy is highly uncertain and caution must be exercised.
Robert Hughes
Robert Hughes joined AIER in 2013 for more than 25 years researching economic and financial markets on Wall Street. Bob was previously head of Brown Brothers Harriman’s Global Equity Strategy, where he developed an equity investment strategy combining top-down macro analysis with bottom-up fundamentals.
Prior to BBH, Bob was a senior equity strategist at State Street Global Markets, a senior economic strategist at Prudential Equity Group, and a senior economist at Citicorp Investment Services and a financial markets analyst. Bob holds an MA in Economics from Fordham University and a BS in Business from Lehigh University.