Real disposable income and real consumer spending fell in May

According to the Bureau of Economic Analysis, personal income rose by 0.5% in May (see first chart). Over the past two and a half years, personal income data has been sharply skewed by lockdown policies that have led to mass layoffs and government stimulus programs that have led to a surge in transfer payments. As distortions disappear, personal income approaches an upward trend (see first graph).

Excluding personal transfer payments, personal income rose 0.7 percent in May and 8.3 percent over the last 12-month period. It is also well above the recent trend line (see first chart).

In real terms (price-adjusted), personal income excluding transfers rose by 0.1% in May, while real disposable income fell by 0.1%. Over the past twelve months, real income excluding transfers has grown by just 1.8%, while real disposable income has declined by 3.3%.

Weak growth in real personal income raises concerns about the outlook for real consumption spending. Total personal consumption expenditure (PCE) rose 0.2 percent in May after rising 0.6 percent in April (see second chart). Among the components, durable goods fell 3.2 percent, while spending on non-durable goods rose 0.7 percent and spending on services increased 0.7 percent on the month.

In real terms, the PCE fell 0.4 percent (see second chart) as real spending on durables fell 3.5 percent, real spending on nondurables fell 0.6 percent, and real spending on services rose by 0.3 percent.

Personal savings rose to 5.4% of disposable income in May from 5.2% in April. However, it remains well below the pre-pandemic level of 7.3 percent in December 2019 and is relatively low compared to historical periods (see third graph).

Price indices from the Personal Income and Expenditure Statement are the main indicators followed by the Federal Reserve. The overall PCE price index increased 0.6% in May as durable goods prices rose 0.3%, nondurable goods prices rose 1.2% and services prices rose 0.4%. The PCE price index excluding food and energy increased by 0.3 percent over the month.

Over the past year, the PCE price index rose by 6.3 percent, the same pace as in the previous month, but below the March figure of 6.6 percent. The core PCE index, which excludes food and energy prices, rose 4.7% year-on-year from 4.9% in April and 5.2% in March.

In general, ongoing labor and production disruptions, shortages of materials, and bottlenecks in logistics and transportation continue to put upward pressure on prices. In addition, the fallout from the Russian invasion of Ukraine and intermittent lockdowns in China continue to disrupt global supply chains, while the Fed’s increasing tightening pushes up borrowing costs. For consumers, rapid price increases hurt real incomes and undermine confidence in the outlook, suggesting a threat to real spending. The outlook for the economy remains highly uncertain, so caution should be exercised.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 after over 25 years of economic and financial market research on Wall Street. Bob previously led the Global Equity Strategy division of Brown Brothers Harriman, where he developed an equity investment strategy that combines macro downside analysis with upside fundamentals.

Prior to joining BBH, Bob was Senior Equity Strategist at State Street Global Markets, Senior Economic Strategist at Prudential Equity Group, and Senior Economist and Financial Markets Analyst at Citicorp Investment Services. Bob holds an MA in Economics from Fordham University and a BA in Business from Lehigh University.

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