US: Consumers are still increasing spending despite inflation – Wells Fargo

Data released on Friday showed consumer spending rose above expectations in June. The 0.1% increase in real personal spending in June shows that even after adjusting for the highest inflation in more than 40 years, consumers are still increasing spending, if only incrementally, said analysts at Wells Fargo. They warn the increase in spending took the saving rate to levels not seen since 2009.

Key Quotes: 

“Like a dazed boxer still on his feet, the U.S. consumer is still in the fight with a consensus-beating increase in both income, which was up 0.6%, and spending, up 1.1%. After adjusting for inflation, real personal spending notched an incremental gain of 0.1%, and last month's real decrease of -0.4% got a slight bump up to -0.3%. To some extent, these details were heralded by yesterday's Q2 GDP report, in which consumer spending was one of the few things still in expansion territory.”

“The consumer is reaching deep to find the means to go on spending in the face of the highest inflation in 40+ years. On trend, income is not keeping up with inflation, so in order to keep on spending, households are putting off saving. In fact, the saving rate at 5.1% is lower than it was during the financial crisis in 2009.” 

“While we do not believe the economy is yet in recession, we do expect it will slip into one by the beginning of next year. The exact timing of recession depends on a number of variables, but how the demand environment evolves is certainly an important component. We are concerned that the uncanny staying power of the consumer will soon run out.”

“In our latest forecast, we have real PCE growth contracting in the fourth quarter of this year. If consumers pull back on spending sooner, that could pull forward the weakness, though if they remain resilient to higher prices and continue to spend, the downturn could very well be delayed.”