Consumer Activity Stronger Than It Appears

Personal Income after adjusting for inflation and taxes rose 0.3% in May, which is better than expected. Consumer spending rose a slightly slower 0.2% after adjusting for inflation in May but revisions over both April and March netted out to be positive. Consumers took a breather at the start of the year in response to a flurry of bad news and unusually chilling winter weather, but are showing signs of coming back in the second quarter. Big discounts, including zero percent financing, helped to fuel a pickup in vehicle sales in recent months after a swoon in the first quarter.

The saving rate has come down substantially since a peak in December. A one-time bonus at one firm in the tech sector and the pullback in spending in the wake of market turmoil during the height of the holiday season artificially boosted the personal saving rate at the turn of the year.

Separately, mortgage refinancing has increased in recent months. That could show up as a pickup in repairs and remodeling this summer if consumers don’t get too skittish about the future. Uncertainty about future policy moves on trade has been proven to delay big spending decisions. Moreover, consumer and business confidence are playing larger roles in determining the course of the business cycle than they have in the past.

The Personal Consumer Expenditure (PCE) deflator rose 0.2% in May and 1.5% from a year ago. The core PCE deflator, which strips out volatile food and energy prices and is the best indicator of future inflation, also rose 0.2%. The PCE core held steady at a 1.6% gain from a year ago. Both measures remain well below the Federal Reserve’s 2% target, which is one of many reasons that the Fed is likely to lower rates at its July meeting. If inflation stays below 2%, then the neutral fed funds rate is even lower than the Fed estimated.

Bottom Line
The headline figures disguised a shift in momentum for consumer spending between the first and second quarters. That said, the pickup is still slower than the pace we saw in 2018. Consumers are expected to spend at a little less than a 2% pace in the first half of 2019 after averaging more than 2.5% in 2018.

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