US Personal Consumption Increase Met Expectations in June

• Personal consumption rose 0.5% in June 2013, thereby matching market expectations.

• On a volumes basis, spending inched up by 0.1% in June for the third consecutive month.

• Personal income posted a 0.3% increase in June, slightly slower than market expectations for a 0.4% increase. The savings rate was 4.4% in June.

• Today’s report confirmed that US real consumer spending increased at a 1.8% annualized pace, which was slower than the first quarter’s 2.3% increase. This slowing reflected a weaker pace of spending on services while purchases of durable goods accelerated. In part, uncertainty regarding the effect of the government’s spending cuts likely quelled consumer spending on services; however, as the amount of fiscal restraint eases, we expect consumer spending to pick up its pace. Consumer spending is also likely to accelerate against a backdrop of persistent employment gains. Today’s 162,000 gain in non-farm payrolls, while less than forecasted, still indicated that hiring continued early in the third quarter. Stronger consumer spending will be a key support to the economy growing at an above-potential rate in the second half of 2013 and throughout 2014. As evidence of this faster growth accumulates, we look for the Fed to reduce the size of its monthly asset purchases. Our forecast assumes that this tapering will start in the fall with the program ending by the middle of 2014.

Nominal personal consumer spending rose 0.5% in June 2013 and built on May’s 0.2% increase. June’s report showed durable goods consumption growing at a 0.8% pace while spending on non-durable goods increased by 1.3%. Spending on services continued to be lacklustre, growing by just 0.2% in nominal terms following a flat reading in May.

On a volumes basis, personal consumption expenditures (PCE) rose by 0.1% in June, the third consecutive monthly increase of this size. The monthly increase in volumes was concentrated in durable goods spending, which jumped by 0.9% with non-durable goods spending rising by 0.2%. Spending on services was flat in June following a 0.2% dip in May and a 0.1% rise in April. The PCE deflator stood at 1.3% in June, which was up from May’s 1.1% pace. The core PCE deflator clocked in at 1.2% and held steady relative to both April and May.

Nominal personal income growth came in slightly weaker than expected at 0.3% in June and built on May’s 0.4% gain. The personal savings rate was 4.4% in June and averaged 4.5% in the second quarter of 2013 from 4.0% in the first quarter.

As with the release of the advance second-quarter 2013 gross domestic product (GDP) estimate on July 31, the Bureau of Economic Analysis provided comprehensive revisions to the historical consumption and income data (back to 1929). Comprehensive revisions are wider in scope than normal annual benchmark revisions because they often include the re-definition of concepts and are typically conducted at five-year intervals. The methodological changes incorporated in these revisions affected reported income because defined-benefit pension plans are reported on an accrual rather than cash basis. The change resulted in a significant shift in the share of income allocated to households. The revision to household income resulted in personal saving being revised upward in the period from 2009-2012. The first quarter’s rate was lifted to 4.0% from the previously reported 2.5%. In the second quarter, the savings rate averaged 4.5%. Real consumption was also revised with growth in 2012 boosted to 2.2% from the previously reported 1.9%.

Today’s report confirmed that US consumer spending increased at a 1.8% annualized pace, which was slower than the first quarter’s 2.3% increase. This slowing reflected a weaker pace of spending on services while purchases of durable goods accelerated. In part, uncertainty regarding the effect of the government’s spending cuts likely quelled consumer spending on services; however, as the amount of fiscal restraint eases, we expect consumer spending to pick up its pace. Consumer spending is also likely to accelerate against a backdrop of persistent employment gains. Today’s 162,000 gain in non-farm payrolls, while less than forecasted, still indicated that hiring continued early in the third quarter of 2013. Stronger consumer spending will be a key support to the economy growing at an above-potential rate in the second half of 2013 and throughout 2014. As evidence of this faster growth accumulates, we look for the Fed to reduce the size of its monthly asset purchases. Our forecast assumes that this tapering will start in the fall with the program ending by the middle of 2014.

 

RBC

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