Incomes and Spending at Risk

Personal disposable incomes fell 1.4% in June after adjusting for inflation, marking the second month of contraction in a row. That was despite a sharp rebound in employment, which showed up in wages and salaries. The decline in income reflects a second month of contraction in government stimulus payments, the bulk of which hit checking accounts in April and May. Interest income also contracted in response to record-low interest rates, but that was small compared to the drop tied to the stimulus payments embedded in the CARES Act. A large, upward revision to income for April more than offset a downward revision to May.

The support provided by expanded unemployment insurance and stimulus checks was substantial and unprecedented. Those benefits are slated to expire today along with a moratorium on evictions, which could exacerbate increases in food insecurity and homelessness. The burgeoning humanitarian crisis, combined with the risk of an even higher pace of COVID infections, could be the worst since the Great Depression.

Personal consumption expenditures (PCE) rose 5.2% after adjusting for inflation, which marked a slowdown from the 8.4% gain in May, but was still substantial. Spending on clothing and shoes led the rise in spending on goods. A sharp increase in spending on health care - elective surgeries picked up most notably - and food and accommodations led spending on services as people drove to vacation spots across the country. Revisions to April and May data largely offset each other.

The PCE index measure of inflation rose 0.8% from a year ago in June, slightly faster than the 0.5% pace we saw in May. A sharp increase in food prices, both in grocery stores and at restaurants, and a slight rebound in the cost of big-ticket durable goods and service sector prices only partially offset a drop in nondurable goods. The PCE index remains well below the Federal Reserve’s 2% target for inflation. Fed Chairman Jay Powell emphasized his concern this week that the economy is more at risk of disinflation than inflation in the months to come, despite the spurt in food prices. The rise in food prices is largely due to a supply shock. Meat and poultry processing plants were forced to close in response to a surge in COVID cases on their premises, while farmers left crops to rot in their fields as the demand from restaurants plummeted during lockdowns.

Bottom Line
Much of the replacement of income lost to the COVID crisis is set to disappear at the very moment that the economy has slowed again in response to a resurgence in infections and deaths. Some cresting of cases in the Sunbelt is being offset by a rise in the Midwest. Those shifts suggest that incomes and spending could be flat to down over the summer, which would be a blow to an economy that remains in a very deep hole.

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