Higher incomes fell short of inflation in June. With gas prices lower, does that reverse in July?

A day after the 2nd quarter GDP report led to a lot of recession talk, June’s income and spending report had added intrigue, to see if data really was pointing toward an economic downturn.

Personal income increased $133.5 billion (0.6 percent) in June, according to estimates released [Friday] by the Bureau of Economic Analysis (tables 3 and 5). Disposable personal income (DPI) increased $120.4 billion (0.7 percent) and personal consumption expenditures (PCE) increased $181.1 billion (1.1 percent).

Those look like pretty good numbers, and that gain in income was driven by another increase in wages and salaries. But owners' income (shown in gray) also continues to go up.

But let’s also remember that June was also the height of jacked-up gas prices/inflation, and the inflation index in the income and spending report reflects that.

The PCE price index increased 1.0 percent. Excluding food and energy, the PCE price index increased 0.6 percent (table 9). Real DPI decreased 0.3 percent in June and real PCE increased 0.1 percent; goods increased 0.1 percent and services increased 0.1 percent (tables 5 and 7).

The 0.6% core inflation number is a problem if it continues, and the increase in real spending mixed with the decline in real disposable income meant that the savings rate declined down to 5.1%.

It's also intriguing to see how Americans continued to adjust their spending in June 2022, as prices differed between products. Real consumption of groceries has declined as the prices of those products jumped in the first half of 2022. But spending in food services and accommodations continues to come back, albeit not as strongly as in the earlier parts of 2022.

With gas prices quite a bit lower than they were in June, and CPI/PCE inflation likely to decline for July, I want to see if the nominal increase in spending stays around June's level of 1%, or if it falls with the prices. Also, we’ve seen wage/salary income rise at quite a strong nominal level (3.86% for first 6 months of 2022) - it just didn’t keep up with the rise in gas/food. Will those raises continue even as prices level off and/or fall?

This June report seems to tell me that Americans were still getting more jobs and better pay as Q2 2022 ended, which certainly isn’t recessionary. They were also continuing to spend, but in a choppier fashion that was influenced by which products were seeing prices go up the most. With gas prices back below $3.50 a gallon in these parts, it now seems like we are rapidly shifting to a different phase where we could softly slow spending and job growth, resulting in a relatively normal 2nd half of this year.

But we also could continue to see hot demand (both for labor and consumption), which could continue and possibly worsen shortages, reigniting inflation in other sectors even as oil falls back toward $90 a barrel.

The jury is far from back on this one, and July’s jobs report is going to give our first indications whether the “healthy slower growth”, “reignite”, or “crash shut” scenarios start to emerge for Q3 and the rest of 2022.