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Consumption Strength Supported By Lower Savings

US OUTLOOK/OPINION
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  • The health of the consumer is therefore likely to garner as much attention as inflation and possibly more so, barring any major surprises in the latter.
  • Nominal consumer spending is seen rising 0.5% M/M as it easily outstrips personal income growth of 0.2% M/M.
  • That should push the saving ratio back close to 3.0%, closer to lows seen in 2022 having been 4.0% in January and 5.3% in mid-2023. With theoretical “excess savings” accumulated through the pandemic having either been recently or nearly exhausted depending on trends/methods used, this suggests limited scope for a continuation of what has been a tailwind to consumption.
  • With headline PCE inflation estimated at 0.2% M/M, it would see real consumer spending rising 0.3% M/M for a third solid month (0.2% in June and 0.4% in May) to leave 3m/3m growth at 2.9% annualized.
  • The expected strength in July follows the surprisingly strong advance retail sales report when nominal sales jumped 1.0% M/M (cons 0.4). The core readings also impressed with ex-auto sales rising 0.4% after 0.5%, ex-auto/gas up 0.4% after 0.8% and the key Control Group up 0.3% after 0.9%.
  • Goods consumption will be expected to show signs of strength in July then, although it has been particularly volatile in recent months (0.25% in Jun after 0.9% in May, -0.45% in Apr and 0.7% in Mar). Services consumption meanwhile, some two thirds of consumer spending, has been somewhat reserved at an average 0.17% M/M over the past four months.
  • A strong report would help push back on recessionary fears and could see a re-pricing of the more than 100bp of cuts priced over the three remaining meetings, albeit limited by markets keenly awaiting next week’s payrolls report. On the flip side, we expect particular sensitivity to any surprisingly sluggish readings in discretionary services-related spending.
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  • The health of the consumer is therefore likely to garner as much attention as inflation and possibly more so, barring any major surprises in the latter.
  • Nominal consumer spending is seen rising 0.5% M/M as it easily outstrips personal income growth of 0.2% M/M.
  • That should push the saving ratio back close to 3.0%, closer to lows seen in 2022 having been 4.0% in January and 5.3% in mid-2023. With theoretical “excess savings” accumulated through the pandemic having either been recently or nearly exhausted depending on trends/methods used, this suggests limited scope for a continuation of what has been a tailwind to consumption.
  • With headline PCE inflation estimated at 0.2% M/M, it would see real consumer spending rising 0.3% M/M for a third solid month (0.2% in June and 0.4% in May) to leave 3m/3m growth at 2.9% annualized.
  • The expected strength in July follows the surprisingly strong advance retail sales report when nominal sales jumped 1.0% M/M (cons 0.4). The core readings also impressed with ex-auto sales rising 0.4% after 0.5%, ex-auto/gas up 0.4% after 0.8% and the key Control Group up 0.3% after 0.9%.
  • Goods consumption will be expected to show signs of strength in July then, although it has been particularly volatile in recent months (0.25% in Jun after 0.9% in May, -0.45% in Apr and 0.7% in Mar). Services consumption meanwhile, some two thirds of consumer spending, has been somewhat reserved at an average 0.17% M/M over the past four months.
  • A strong report would help push back on recessionary fears and could see a re-pricing of the more than 100bp of cuts priced over the three remaining meetings, albeit limited by markets keenly awaiting next week’s payrolls report. On the flip side, we expect particular sensitivity to any surprisingly sluggish readings in discretionary services-related spending.