Income Rises More Than Inflation, Spending Decelerates, Confidence Improves, Chicago Manufacturing Slows

- Personal Income for May rose .4% versus estimates of a .2% gain and an upwardly revised .7% increase in April.
- Personal Spending for May rose .4% versus estimates of a .4% increase and an upwardly revised .7% gain in April.
- The PCE core for May rose .2% versus estimates of a .2% increase and a .2% gain in April.
- Final Univ. of Mich. Consumer Sentiment for June rose to 84.9 versus estimates of 82.5 and a prior estimate of 82.4.
- The Chicago Purchasing Manager Index for June fell to 56.5 versus estimates of 59.0 and a reading of 61.5 in May.

BOTTOM LINE: US consumer spending in May rose the least in three months and a measure of inflation watched by the Fed remained steady, Bloomberg said. Disposable income, or the money left over after taxes, rose 4.7% over the last 12 months. The PCE core, the Fed’s favorite inflation gauge, rose 2.1% over the last 12 months. Spending on services, which comprise almost 60% of all spending, gained .3% versus a .1% rise the prior month. Consumer spending rose 5.1% last quarter, the most in over two years. I expect income growth to remain steady around current levels and spending to slow to more average rates over the intermediate-term. I continue to believe inflation fears have peaked for the year.

Americans were more confident in June for the first time in three months as a decline in gas prices left them more to spend on other goods, Bloomberg said. The expectations component of the index rose to 72.0 versus 68.2 the prior month. Americans’ perceptions of their financial health and whether it’s a good time to buy big-ticket items surged to 105.0 versus 96.1 the prior moth, the largest gain this year. The expected inflation component of the index fell. Consumers see inflation decelerating to 3.3% over the next 12 months versus expectations of a 4% rise the prior month. I expect consumer sentiment to rise from irrationally low levels next month.

Growth at businesses in the Chicago area slowed in June, and a measure of prices paid for raw materials gained, Bloomberg reported. The prices paid index rose to 89 versus a reading of 76.9 the prior month. The new orders component of the index fell to 57.2 versus 69.6 the prior month. The employment component of the index decreased to 50.4 this month from 52.8 in May. I continue to believe manufacturing is slowing to average levels.