PCE Income-Spending Gap Suggests Nascent Consumer Caution

May's PCE report showed a pickup in disposable income and a slight uptick in overall spending in May, though subdued consumption (especially for services) and an unexpected jump in the household savings rate suggests some caution by consumers in mid-quarter.

• Real disposable income rose by the fastest in 16 months at +0.5%, following on from 3 cumulatively flat months. Nominal income growth came in at 0.5% M/M (0.48% unrounded), vs 0.3% prior - bringing the 3M/3M annualized rate of growth to 5.7%, down from 6.2% prior but still very elevated by historic standards. That in turn was driven by a bounceback in employee compensation to 0.6% M/M from 0.2% prior, with wages and salaries +0.7%, leaving disposable income growth at +0.45% M/M, up from 0.25% prior.
• Nominal spending ticked higher to 0.2% M/M (almost in line with the 0.3% consensus at 0.248%, but still a slight disappointment given April was revised down 0.1pp to 0.1%), Goods and services purchases each rose a similar amount (0.2% and 0.3% respectively), with overall real spending up 0.3% M/M (vs -0.1% prior).
• The real spending figure was in line with consensus expectations, and keeps the 3M/3M annualized rate at 1.5% after April's 11-month low 1.3%. That's equal to the Q1 real PCE figure of 1.5%. In other words, real spending in Q2 looks much more subdued than the 3+% rates at the turn of the year. On a Y/Y basis, real personal consumption expenditure was up 2.4% (goods +1.7%, services 2.8%).
• On a price-adjusted basis, goods consumption jumped to +0.6% from -0.1% prior, led by durables; real services consumption in contrast has been flatlining at 0.1-0.2% M/M the past 3 months, with a 3rd sequential slowdown in May to 0.10%.
• Of note, the household savings ratio unexpectedly rose to a 4-month high 3.9%, up from 3.7% prior (rev up from 3.6%). With the growth in disposable income comfortably exceeding that of spending, the overall picture is of slightly more cautious American households in mid-Q2.