August 31, 2017 – Consumer spending, measured by Personal Consumption Expenditures (PCE), makes up approximately two-thirds of the economy and is a direct measure of purchasing activity. We see where consumers are spending their dollars, whether it be durable and nondurable goods, or on services. Changes in the personal income level dictate consumer spending.
Personal income bumped up 0.4% in July, in line with expectations. Consumer spending increased 0.3% for the month from the previous month’s revised 0.2% increase. For the second straight month of increases, wages and salaries experienced a 0.5% gain in July. The PCE index stayed in line with expectations, with a 0.1% increase in both PCE and core PCE (excluding food and energy). PCE is up 1.4% year-over-year and core PCE is up 1.4% over the last year.
The bump in personal income can be attributed to the past 2 months of increasing wages and salaries. With consumer spending 0.1% lower than personal income, this could signal people are starting to save more of their income instead of spending. Spending money pushes money through the economy stimulating healthy economic growth; however saving money is effective in a different way. Saved money is frequently invested into financial markets which can drive and grow the stock and bond markets. Even money that is put into a savings account is used by the banks to give out loans which ends up being pushed through the economy.