Another Solid Spending Report Supports Expectations of Stronger Q2 GDP
- U.S. Personal Income increased by 0.2 percent in May.
- After inflation and taxes, Real Disposable Income gained 0.1 percent for the month.
- Nominal Consumer Spending increased by 0.4 percent in April. Real spending gained 0.3 percent.
- The S&P/Case-Shiller U.S. National Home Price Index gained 0.1 percent in April.
Income and spending data for May were solid, building on good data for April, and supporting expectations of a rebound in real GDP growth for the nearly complete Q2 to about 2.5 percent. Nominal personal income for May increased by 0.2 percent as wages and salaries also gained 0.2 percent, not bad considering the very weak payroll employment growth in May of just 38,000 net new jobs. Inflation was moderate for the month as the PCE price index gained 0.2 percent. Over the previous 12 months, the PCE price index was up by 0.9 percent. The energy component of the PCE price index was up 1.4 percent in May after gaining 3.8 percent in April. Excluding food and energy, the core PCE price index increased by a moderate 0.2 percent in May, finishing the 12-month period up by 1.6 percent. After adjusting for moderate inflation and a 0.2 percent increase in personal taxes, real disposable income was up by 0.1 percent for the month. Nominal personal spending was up by 0.4 percent in May. Real spending gained a respectable 0.3 percent after growing by 0.8 percent in April. With spending up more than income, the personal saving rate ticked down to 5.3 percent.
According to the S&P Case-Shiller U.S. national house price index, house prices increased by 1.0 percent on average in April, and are up 5.0 percent nationwide over the last year. Most of the 20 cities covered showed gains for the month, and moderate-to-strong gains over the previous 12 months. Dallas house prices are up 8.6 percent over the last year. Detroit is up 5.7 percent. Los Angeles gained 5.9 percent. Miami, 6.4 percent. Phoenix, 5.5 percent. San Diego, 6.3 percent. San Francisco house prices are up 7.8 percent over the last year.
Both the income/spending and the house price reports are supportive of overall consumer spending, which accounts for two-thirds of U.S. GDP. With stronger U.S. GDP growth, domestic demand for crude oil will increase. We will be watching European and Asian economic indicators through the second half of the year to see if global demand for crude will continue to increase. BREXIT is obviously a challenge to the European economy, with possible spillover effects for the U.S. and Asia. Crude oil demand growth accompanied by declining non-OPEC crude production is still expected to tighten crude oil inventories this year and support firmer prices, and push on inflation. Stronger inflation in a stable U.S. and global economic environment could lead to one fed funds rate hike this year, likely not coming until December. But that scenario has been undercut by BREXIT. Meanwhile the U.S. election cycle will heat up, as well as the British election cycle, and this could keep a lid on consumer confidence this fall. With lots of economic and political levers in play, we retain our view that the U.S. economy will continue to show moderate growth into 2017. Stay tuned.
Market Reaction: U.S. equity markets opened with strong gains. The yield on the 10-year Treasury bond is down to 1.46 percent. NYMEX crude is up to $48.97/barrel. Natural gas futures are up to $2.86/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Personal Income 06-29-16.
