U.S. Income Growth Matches Estimates But Spending Growth Falls Short

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Personal income in the U.S. increased in line with economist estimates in the month of May, according to a report released by the Commerce Department on Thursday, although the report also showed a smaller than expected increase in personal spending.

The report said personal income rose by 0.4 percent in May after climbing by 0.3 percent in April. The continued income growth matched the consensus estimate.

Disposable personal income, or personal income less personal current taxes, also rose by 0.4 percent in May after climbing by 0.4 percent in the previous month.

Meanwhile, the Commerce Department said personal spending edged up by 0.2 percent in May after coming in unchanged in April. Economists had expected spending to increase by 0.4 percent.

The report also showed that real spending, which is adjusted to remove price changes, dipped by 0.1 percent in May following a 0.2 percent drop in April.

With income rising at a faster rate than spending, the report also said personal saving as a percentage of disposable personal income climbed to 4.8 percent in May from 4.5 percent in April.

Chris Low, chief economist at FTN Financial, said, "A month ago, strong consumer spending was the reason not to worry about weak Q1 GDP growth. Spending was up 3% in Q1 and was expected to be as strong in Q2. With a strong consumer, GDP was a sure bet to quickly revert to a rising track."

"The May data and Jan-April revisions tell a very different story," he added. "Consumption rose just 1.0% in Q1 and is tracking 1.25% in Q2. Unless June data are strong, we'll be lucky to hit 2% GDP in the second quarter."

Low subsequently suggested that GDP growth for the year could be as weak as 1 percent, which he said would demand a rethink by the Federal Reserve and should have investors questioning the 6 percent year-to-date rise in stocks.

The personal income and spending report also includes readings on consumer price inflation that are favored by the Federal Reserve.

The Commerce Department said its personal consumption expenditures price index rose by 0.2 percent for the third straight month. The annual rate of growth subsequently accelerated to 1.8 percent in May from 1.6 percent in April.

Core PCE, which excludes food and energy prices, also rose by 0.2 percent for the third straight month and was up 1.5 percent year-over-year.

Rob Carnell, chief international economist at ING, said, "In the next few months, we should see PCE inflation touch, and then exceed 2.0%, and around the time that this happens, the unemployment rate will have reached close to 6.0% or even slightly below, and QE will be on the verge of ending."

"At this time, markets will be thinking hard about what comes next, and the FOMC may even have begun to match this market sentiment change with some more consistent rhetoric of their own," he added.

In her post-meeting press conference last Wednesday, Fed Chair Janet Yellen acknowledged that recent inflation data has been on "the high side" but also described the data as "noisy."

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