MS - May Personal Income & Spendingpdf
MS - May Personal Income & Spendingpdf
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  1. M UpdateUS Economics | North AmericaMay Personal Income & SpendingMorgan Stanley & Co. LLCEllen ZentnerChief US EconomistEllen.Zentner@morganstanley.com+1 212 296-4882Sam D CoffinEconomistSam.Coffin@morganstanley.com+1 212 761-4630Diego AnzoateguiEconomistDiego.Anzoategui@morganstanley.com+1 212 761-8573Sarah A WolfeEconomistSarah.Wolfe@morganstanley.com+1 212 761-0857Lenoy DujonUS/Canada EconomistLenoy.Dujon@morganstanley.com+1 212 761-2779Core PCE prices up 0.08% in May (annual rate at 2.57%Y), a tick below expectations. We expect continued improvement in inflation, keeping the Fed's intention to cut alive. Spending slowed more than income, lifting the saving rate to 3.9%. PCE Inflation: Core PCE inflation rose 0.08% in May, slightly below our expectation (0.1% consensus vs. 0.10% MSe), and the year-over-year rate came at 2.57% (vs. 2.78% in April). As suggested by yesterday’s GDP report, there were upward revisions in services components in 1Q. In particular, financial services and insurance was revised upward in January. Note, however, that this is a volatile component and the revision should not be interpreted as implying further inflationary pressures ahead. The latest print brings core PCE annualized inflation in the last 3 months to 2.74%, a drop from Apr-24 which was 3.45%. The deceleration in the 3-month pace of core PCE inflation is aligned with our call for disinflation ahead, especially in 2H24. We keep our call for 3 cuts this year starting in September.Core goods inflation came in negative after three months of positive readings (-0.18%M). Core services decelerated (0.17%M vs 0.31% in April), with deceleration in most categories excluding rents with a slight acceleration (0.42% vs 0.41% in April). Core services ex housing increased 0.10%M (0.28% in April). Headline PCE inflation came in at -0.01%M (0.26% prior), bringing the year-over-year rate to 2.56% (vs 2.68% prior).Marking to market the revisions and the print in May we keep forecasting core PCE inflation at 2.7% 4Q/4Q, below the Fed's current median forecast of 2.8%. The overall monthly pace consistent with the Fed’s forecast is 0.20%M, lower than our forecast of an average monthly pace of 0.18% for the rest of 2024. Note, however, that the Fed's SEP inflation projections might be old, as most FOMC participants have not included the last CPI print in their published forecasts.For important disclosures, refer to the Disclosure Section, located at the end of this report.June 28, 2024 01:06 PM GMT
  2. M Update2Exhibit 1:June SEP implied path for Core PCE MoM rates0.20%0.00.10.20.30.40.50.6Core PCE MoM rates (%)ActualMS forecastsSEP-implied 2024 average MoM rateSource: BEA, Fed, Morgan Stanley ResearchTracking Update & Broader Implications:We lower our consumption tracking from 1.8% Q/Q annualized growth to1.7% in 2Q, a tick higher from 1.5% in 1Q24. Real services consumption is still running at a solid pace, but slowing – increasing 2.1% vs. 3.3% in 1Q23. Goods consumption is running at 0.9% in 2Q, a rebound from -2.3% in 1Q. We lower our GDP tracking from 2.0% to 1.9% in 2Q.Recent data on consumer spending, in particular weakness in goods consumption and a deceleration in services spending, is showing that monetary policy is restrictive and weighing on economic activity. We expect that softening in economic activity paired with abating inflationary pressures will allow the Fed to cut starting in September. As discussed in our Year-Ahead Outlook, we forecast three 25bp rate cuts this year and four next year, leaving the funds rate at 3.625% in mid-2025. Personal Income and Spending: Nominal personal income in May was above expectations increasing 0.5%M (consensus 0.4% and MSe 0.4%) vs. 0.3% prior. Labor compensation was strong – increasing 0.6%M vs. 0.2% prior, stronger softer job gains and earnings in May. Nominal personal spending was in line with our expectations, increasing 0.2%M (consensus +0.3% and MSe +0.2%M) vs. 0.1% prior (revised down 10bp). Real PCE was slightly stronger coming in at 0.3%M, a rebound from -0.1% in April. The report showed services are continuing to outpace goods consumption, but there is deceleration across the board. Services consumption increased 0.3%M – sequential cooling from 0.9%M in January. Healthcare and transportation services were strong, while more discretionary categories like recreation services, food services, and accommodations were weak after three strong months.Good consumption increased 0.2%M, a rebound from -0.5% in April, but the overall path for goods consumption this year has been weak. Motor vehicle and home
  3. M UpdateMorgan Stanley Research3furnishing were weak, while recreational goods and vehicles saw a re-acceleration this month, driving up overall durable goods expenditures. Within nondurable goods, strength in apparel and other nondurables outweighed weakness in food and gasoline sales.There were downward revisions to spending in April and February (March unchanged) – nominal PCE for both months were revised down 10bp, April to 0.1% and February to 0.6%. The 1Q24 GDP third release yesterday showed 50bp in downward revisions to consumption to, driven by downward revisions across goods and services.Consumption was softer than income, pushing the saving rate up 20bp to 3.9%.Exhibit 2:Personal Income & Spending DashboardNote: This table does not include all the underlying details of personal income, just select categories. For full details of the personal income and spending report, see here. Source: Bureau of Economic Analysis, Morgan Stanley Research
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