Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson, the wealth management and professional services group, comments on August US personal income and spending data:
What happened?
In the month of August, nominal personal income rose 0.2% (consensus: 0.3%) versus 1.1% in July, while spending rose 0.8% (consensus: 0.6%), against -0.1% in July.
The personal savings rate fell to 9.4% from 10.1% in July and remains elevated compared to a pre-pandemic level of 7.3% at the end of 2019.
The core (ex-food/energy) personal consumer expenditure deflator rose 3.6% from a year ago versus 3.6% in July.
What does it mean?
In short, the stats show that US consumers have sufficient financial resources to spend and are confident enough to shrug off concerns over new Covid strains. In real terms, consumer spending rose 7.0% in August from a year ago, a healthy rate compared to average annualised growth of 2.3% during the last business cycle between June 2009 and February 2020. While consumer expenditure was flattered by a low base last year, there are three reasons for consumers to remain confident to spend and extend the business cycle.
First, the Federal Reserve recently reported that US net household wealth rose to a record 7.9 times annual take-home pay in the second quarter of 2021. Rising net household wealth is a powerful incentive for consumers to run down savings and borrow against assets to raise consumption. There are signs of this happening, with the personal savings rate trending down and household loans (mainly mortgages) rising by 8.6% at an annualised rate in the second quarter – the fastest rate for fourteen years.
Second, personal income growth is also recovering, supported by a recovery in employment. After falling 22m during the pandemic, total non-farm employment has since risen by 17m. Given that the economy is back to pre-virus levels and there are record job openings, there is plenty of room for job creation to continue. Moreover, employees are receiving higher wage rates and working longer hours since the pandemic broke out.
Third, putting together these financial resources available to consumers from housing wealth, take-home pay (income after tax is deducted) and consumer credit, this measure of real consumer purchasing power rose 2.8% from a year ago in the second quarter of 2021. This adds a backbone of support for consumption to grow at a similar rate.
The immediate risk for consumption is that rising inflation (and particularly higher food and energy prices) depresses demand. However, given that the share of food and energy in consumption remains historically low at 11.7%, roughly half the share at the start of the inflationary 1970s, there is considerable room for consumers to weather this near-term issue. Looking forward, we see consumption driving up company earnings and providing a broadly favourable backdrop for equities.
