US DATA: Accelerating Consumer Demand Defies Subdued Income Dynamics

July's personal income and spending data came out close to expectations, but the internals highlighted strong consumer activity despite deteriorating real incomes. The inflation developments in the report help the case for Fed cuts, but the continued resilience of the US consumer could be viewed as a sign that aggregate demand remains strong despite prior rate hikes.

• Personal income rose by 0.3% M/M, a bit higher than the 0.2% expected (and 0.2% prior), with employee compensation growth steady at 0.3%. After-tax real disposable income grew by 0.1% for a second consecutive month, in line with the 2024 monthly average gain - resulting in soft Y/Y growth of 1.1% in July compared with the 4+% average in 2024.
• Even though real incomes have downshifted, personal spending growth remained robust at 0.5% M/M (in line with consensus) as nominal goods purchases accelerated (0.7% from 0.1% prior) and services consumption remained steady (0.4%, same prior). On a real basis, total personal spending picked up to 0.4% M/M (0.3% prior rev up from 0.2%).
• Quarterly GDP revisions the day prior showed personal consumption responsible for the lion's share of growth in Q2 -  2.9% Q/Q SAAR rose at double the unrounded Q1 pace - and here we saw an acceleration in July (3.8% on a 3M/3M annual rate basis, highest since March 2023) to suggest robust activity to kick off the third quarter. In other words, even with softer disposable income growth, US consumers continue to spend.
• This is also manifested in the household savings ratio, which dipped to 2.9% from 3.1% prior, the lowest since June 2022 which itself was the lowest since 2008. The direction of travel is toward an exhaustion of the early pandemic savings accumulation, but this is not reflected by the spending data just yet.