Incomes up, spending up, and inflation staying under control

If you’re hoping for the combination of interest rate cuts and a US economy staying in good shape, Friday’s income and spending report hit the spot.

US July Personal income, spending & PCE price index: Disinflation amidst strong spending and solid income gains. Spending up 0.5%, income 0.3% & real spending 0.4%. PCE price index up 0.2% m/m & 2.5% y/y while the core advanced 0.2% & 2.6%. Disposable income up 0.3% nominally and…

— Joseph Brusuelas (@joebrusuelas) August 30, 2024

That gets Q3 off to a good start, with solid consumption growth and inflation staying in check. In fact, inflation was below 2% on an annual rate for July, since PCE price index only rose by 0.155% for the month, and it’s only up 1.16% over the last 6 months (or just above 2.3% on an annual rate).

The income side also painted a good picture if you want that “middle ground” between something that might re-fire inflation, and something that might lead to recession. Wage and salary income grew by 0.35% and total personal incomes were up 0.31%. It’s more proof that we’ve been in a new post-COVID equilibrium of wage/income growth that runs at an annual rate around or just below 4% while inflation stays a little over 2%.

We’ve also had growth in real per-capita income for each of the last 3 months, and in 5 out of 7 for 2024. In addition, post-inflation per-capita income has gone up more than $1,000 since the end of 2020, and 6.6% since the end of 2019.

So yes, Americans are generally better off than they were 5 years ago, and they have regained almost everything that was lost to the inflation spike from mid-2021 to mid-2022. And that's before we discuss the large increases in wealth for homeowners and stockholders in 2023 and 2024.

The one big concern is that the savings rate dove below 3% due to consumption growth outpacing income growth. And it’s legitimate spending, as for the first time in 2024, the amount of non-mortgage interest payments made by Americans dropped. But that hasn’t been true over the last 2 years as the Federal Reserve has jacked up interest rates to 23-year highs. As a result, between the end of 2021 and late 2023, the amount of non-mortgage interest payments for Americans more than doubled, and has stayed at or near that high level since then.

This is yet another reason why the Federal Reserve has been behind reality when it comes to cutting interest rates. The higher amount of interest and higher cost of housing are both burdens that can be lessened with lower interest rates, and the real threat to Americans maintaining our generally solid economy n 2024 is if more Americans lose their jobs, especially in the interest-rate sensitive manufacturing and construction industries.

So while some might complain that this income and spending data is too good to allow for a 50-point rate cut in 2 1/2 weeks, I'd argue that the Fed should catch up to the 1/4 point they should have done back in July, instead of staying behind the curve if they choose to have their first cut be 1/4 point in September. But given that unemployment claims have stayed low in August and gas prices have dropped by 5% this month, I would imagine the next income and spending report that comes out for this month will be another good one.