U.S. Personal Income and Spending Rose 0.7% in May, Exceeding Expectations

U.S. personal income and consumer spending each advanced 0.7% in May, surpassing consensus expectations. Personal income growth, at +0.7%, significantly exceeded the anticipated 0.4% increase. Similarly, personal consumption, which grew 0.7% (or 0.4% with prior month revisions), narrowly beat the projected 0.6% rise. Over the past year, personal income has climbed 3.8%, while spending has seen a more robust 6.3% increase.

Disposable personal income, representing income after taxes, also recorded a 0.7% gain in May (0.8% including revisions), marking a 4.1% rise from a year ago. However, despite these gains, purchasing power from private sector wages and salaries, which rose 4.1% over the past year, remained flat when adjusted for inflation.

Inflation, as measured by the overall Personal Consumption Expenditures (PCE) deflator, rose 0.4% in May, bringing the year-over-year increase to 4.1%, the highest since early 2023. The "core" PCE deflator, which excludes volatile food and energy components, increased 0.3% in May, with its year-over-year growth reaching 3.4%. This marks a notable acceleration from the 2.8% pace observed in the twelve months ending May 2025.

Driving the income growth were government transfer payments, up 0.6% in May (+4.6% year-over-year), and a significant boost from farm proprietors' income due to a second round of Supplemental Disaster Relief Program payments. On the spending side, the 0.7% increase in personal consumption was primarily led by expenditures in financial services and insurance, healthcare, and housing and utilities. Goods spending, including energy costs, saw a 0.9% jump, while services spending increased 0.6%.

The personal saving rate remained at 3.0% in May, matching the prior month and tying for the lowest level since summer 2022. This subdued saving rate, last seen at this level in 2008, enables higher current consumption but raises questions about long-term sustainability. The Federal Reserve is expected to closely monitor these evolving inflation dynamics and a modest pace of job growth, with initial jobless claims falling by 12,000 to 215,000 last week, while continuing claims rose by 21,000 to 1.821 million.

Key terms:

1. **Personal Consumption Expenditures (PCE) Deflator**: A measure of inflation that tracks the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is the Federal Reserve's preferred measure of inflation.

2. **Core PCE Deflator**: The PCE deflator excluding food and energy prices. This measure is often used to get a clearer picture of underlying inflation trends, as food and energy prices can be highly volatile.

3. **Personal Saving Rate**: The percentage of disposable personal income that is not spent or paid out in taxes. It indicates the proportion of after-tax income that households are saving.