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

Personal income in the U.S. climbed 0.7% in May, outperforming the consensus estimate of a 0.4% rise. Concurrently, personal consumption expenditures also advanced by 0.7%, slightly besting the projected 0.6% increase. Over the past year, personal income has grown by 3.8%, while spending has seen a more substantial 6.3% increase.

Disposable personal income, representing income after taxes, registered a 0.7% increase in May and stands 4.1% higher than a year ago. These gains in income and consumption occurred against a backdrop of persistent inflationary pressures.

The Personal Consumption Expenditures (PCE) deflator, a key inflation gauge, rose 0.4% in May, bringing its year-over-year increase to 4.1%, the highest level since early 2023. The "core" PCE deflator, which excludes volatile food and energy components, increased by 0.3% in May, pushing its annual growth to 3.4%. After adjusting for inflation, "real" consumption saw a 0.3% rise in May and is up 2.1% from a year prior.

The increase in income was partly attributed to a second round of payments from the Supplemental Disaster Relief Program, which boosted farm proprietors’ income. Private sector wages and salaries advanced 0.4% in May, representing a 4.1% increase over the last year. Despite this growth, purchasing power from wages has remained relatively stagnant due to inflation. Government transfer payments also contributed to income growth, rising 0.6% in May and 4.6% annually. On the spending side, the 0.7% rise in personal consumption was primarily driven by increased expenditures in financial services and insurance, health care, and housing & utilities. Goods spending, including energy costs, saw a notable 0.9% jump, while services spending increased by 0.6%.

The personal saving rate held steady at 3.0% in May, matching the prior month and marking the lowest reading since the summer of 2022. This low saving rate, last seen in 2008, enables higher current spending but may not be sustainable long-term. With inflation persisting and displaying a temporary worsening due to geopolitical factors, the Federal Reserve is expected to closely monitor these economic indicators. Recent data also showed initial jobless claims falling by 12,000 to 215,000 last week, while continuing claims rose by 21,000 to 1.821 million, suggesting a continued modest pace of job growth.

Key terms

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

2. Disposable Personal Income: The amount of money that households have available for spending and saving after income taxes have been accounted for.

3. Personal Saving Rate: The percentage of disposable personal income that is saved by individuals rather than spent.