Consumer spending as measured by the Personal Consumption Expenditures (PCE) index increased 0.3% in May, after adjusting for inflation. That followed a strong and upwardly revised set of data for April. We see spending in the second quarter poised to rebound from lackluster first quarter spending.
The personal saving rate moved down to 5.3%, annualized; that marks a return to levels seen last year, after being elevated in the first quarter of this year. The drawdown in savings is consistent with the improvement we saw in consumer sentiment during the month of May. We expect the saving rate to increase and spending to moderate for the month of June; consumer expectations notched down when individuals were caught off guard by the recent market volatility driven by Britain’s vote to leave the European Union (Brexit).
Personal income growth disappointed in May, growing 0.2% from the previous month and coming in 0.1% below expectations. Recent softening in employment gains, averaging just over 80,000 during the months of April and May, combined with wage acceleration seemingly stuck near 2.5%, are the likely culprits behind May’s lackluster personal income growth.
Separately, the headline PCE price index slowed to 0.93% from last year. That slowdown can be attributed to decreased prices of food (down 0.31%) and energy (down 11%) over the same time period. Core PCE, which excludes the volatile food and energy components, continued to move higher, rising 1.62% from last year. We expect recent firming in oil prices to show up in headline PCE inflation in the coming months as the base year comparisons become easier.
Bottom Line: The stronger spending we’ve seen so far in the second quarter may be at risk if consumers remain uneasy due to financial market fallout. Today’s data are likely to make little impact on the Federal Reserve, which appears to have been sidelined after the Brexit vote.