U.S.: Spending on services is getting its mojo back - TD Bank Financial Group

ActionForex, analysts at TD Bank Financial Group discuss the latest report on U.S. personal income and outlays in May.

"Personal income declined by 2.0% month-on-month in May, better than the median consensus estimate for a fall of 2.5%. Another pullback in stimulus payments accounted for the deterioration."

"Personal spending was flat (+0.0%) month-on-month in May, below the consensus call for 0.4%... Spending on services rose by 0.7%, slowing slightly from the 1.1% gain of the previous month... Offsetting gains in services, goods spending declined by 1.3%, but from upwardly revised 0.5% growth in April (originally reported as a 0.6% decline)."

"With the pullback in income, the personal saving rate edged down from 14.5% in April to 12.4%. The rate remains historically high, roughly five percentage points above its pre-pandemic level."

"The overall PCE price deflator rose by 0.4% m/m, slightly lower than the consensus estimate of 0.5%. Relative to May 2020, the index was up 3.9%. The Fed’s preferred inflation measure - the core PCE price index -  rose by 0.5% m/m and 3.4% year-on-year, close to the consensus expectation for 0.6% m/m and 3.4% y/y, respectively."

"The services sector is getting its mojo back thanks to a broader business reopening and increased confidence of people to get back to normal. The most affected sectors of the economy – transportation, recreation, and food services & accommodations – were the biggest contributors to growth in May. With pent-up demand for pandemic-constrained services unleashing further, we expect consumption to grow at a double-digit rate (annualized) in the second quarter of 2021."

"Driven by an expected waning of economic impact payments, the decline in personal income is tempting to skip over. Still, it’s worth noting the steady growth in wages & salaries, whose level is now above its pre-recession trend, paving the way for continued growth once the impact of stimulus payments is more fully in the rear-view mirror."

"Inflation continues to raise eyebrows. Still, the increase in May was expected given base effect and transitory factors associated with a fast reopening of the economy... Until the Fed has more proof of inflation’s persistence it is unlikely to signal a more aggressive policy stance."