Spending Slows Despite Higher Incomes

Personal disposable incomes rose an inflation-adjusted 0.1% in April after contracting in March. A drop in the number of hours worked during the month slowed the pace of growth in wages and salaries. Farm incomes stabilized after dropping sharply during the previous month. Farm subsidies have been slow to take effect and failed to offset the drag created by retaliation from China over. Unusually heavy rains exacerbated the situation. Only 58% of corn had been planted by May 26, the lowest pace on record; less than a third of the soybean crops had been planted, less than half the historic average.

Separately, Social Security payments, which are rising in response to the aging of the baby boomers, crossed the $1 trillion threshold for the first time in history last month. That is before adjusting for inflation. The payments, combined with outlays for Medicare and Medicaid, are expected to drive the federal deficit in the year ahead. Up until recently, tax cuts overshadowed the rise in entitlements and discretionary spending when it came to calculating the federal deficit.

Consumer spending slipped an almost imperceptible 0.1% in April after adjusting for inflation; that followed a rebound in March. The biggest losses were in big-ticket durables. Domestic vehicle sales plummeted after surging the month prior. Spending on services was also weak but that was largely due to a drop in spending on electricity and gas. March was an unusually cold month across much of the U.S.. We were finally able to turn down our heaters last month. The saving rate edged a tick higher to 6.2% in April.

The personal consumption expenditures (PCE) deflator rose 0.3% as a pickup in energy prices more than offset a drop in food prices. The PCE index rose 1.5% from a year ago. The PCE excluding food and energy edged up 0.2%, which pushed the index up a tick to 1.6% on a year-over-year basis. That is still well below the Federal Reserve’s stated target of 2% inflation. This, combined with the escalation of trade wars with China and Mexico, gives the Fed ample latitude to cut rates preemptively, if necessary. The threshold for a rate cut is currently much lower than it is for a rate hike.

Bottom Line
Personal disposable income and consumer spending data confirm a slowdown in consumer spending in 2019 despite persistently strong employment gains. The slowdown is not enough to raise red flags yet but, when combined with persistently weak inflation and threats of additional tariffs, it could prompt the Fed to make a preemptive cut in rates in 2019.

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