Consumer Spending Set for Dramatic Downshift in Q2

Economics Group of Wells Fargo Bank, N.A. Summary Core PCE inflation is still running hot, but it edged slightly lower to 4.6% in May according to today’s personal income and spending report. Revisions to prior data reveal that after a hot start to the year, personal spending is stalling in the second quarter. Revisions Set Up an Ugly Q2 for Consumer Spending The staying power of the consumer has outlasted expectations in this cycle and on the face of it, today’s mostly in-line-with-expectations report on personal income and spending signals more of the same; but the more consequential dynamic today was the revisions. On the heels of yesterday’s revisions to first quarter GDP, which lifted the growth rate for consumer spending to 4.2%, today’s personal income and spending report sheds some light on growth in the second quarter. What appears to be a relatively benign report actually looks worse upon further examination. Personal income rose 0.4% as nominal spending edged 0.1% higher. Yet after adjusting for inflation, real spending was technically negative before rounding (-0.03%). That marks the third monthly decline in the first five months of the year (chart). We had already expected a slowing in second quarter spending; our forecast going into today’s report was 2.0% which would have meant consumer spending would have slowed to half its growth rate from the first quarter. It now appears that we may need to cut our own forecast in half. A flat June with no revisions to prior data suggests real PCE grows would come in at an annualized rate of just 0.8% in Q2, it would take a monthly increase of 0.2% to lift that to 1.0%. READ FULL ARTICLE >>