Real consumer spending fell in April and month-on-month inflation readings moderated following the spikes seen over the first quarter of the year. Real disposable income growth contracted in the month, savings rates remained very low, and interest payments on debt rebounded. We remain pessimistic about the sustainability of consumer spending and expect pull back over the summer. From the Federal Reserve’s perspective, these data show that tight monetary policy is weighing on the economy. While some progress was seen on the inflation front, price increases remain above the Fed’s target of 2%. We continue to forecast that the Fed will wait to cut interest rates until the end of the year.

Highlights

Collectively, these data show that tight monetary policy is weighing on the economy. Real personal consumption expenditures (PCE), which include spending on both goods and services (unlike the retail sales report which is goods-focused) fell in April. Real disposable personal income growth also declined. Consumer savings remained at just 3.6% - well below the 7.4% average seen in 2019. Finally, non-mortgage interest payments remain near record highs due to elevated interest rates and outsized debt levels. We continue to expect that US consumers will have to pull back on spending over the summer as they rebalance their priorities on spending, savings, and debt.

On inflation, the April PCE deflators showed some modest improvement. On a month-on-month basis, the headline reading was 0.26% (vs. 0.34% in March) and the core reading was 0.25% (vs. 0.33% in March). While these readings are down from the spikes recorded over the first three months of the year they remain hotter than the rates seen over much of 2023. In year-on-year terms the headline and core readings were roughly flat from the month prior. These data will not be enough to trigger the Federal Reserve to cut rates in the near-term.

Spending Details

Personal consumption expenditures rose by 0.2% m/m (in nominal terms) in April, vs. 0.7% m/m percent in March. Spending on services rose by 0.4% m/m while spending on goods fell 0.2% m/m. However, after accounting for inflation, real consumer spending was down 0.1% m/m in April with spending on services rising 0.1% m/m and spending of goods falling 0.4% m/m. April real spending was -0.6% on an annualized basis, vs. the Q1 2024 reading of a 2.0% annualized gain.

Inflation Details

Headline PCE prices rose by 2.65% y/y in April, vs. 2.70% y/y in March, and core PCE price inflation (which excludes food and energy) rose by 2.75% y/y, vs. 2.81% y/y in March. On a month-over-month basis, headline PCE inflation rose by 0.26%, vs. 0.34% in March, and core PCE inflation rose by 0.25%, vs. 0.33% in March. Prices for goods rose 0.22% m/m and services rose 0.27% m/m. Food prices decreased 0.2% m/m and energy prices rose 1.2% m/m. Within services, rental price increases continued to gradually slow which will be important for inflation to return to the Fed’s 2% target.

Income Details

Overall personal income rose by 0.3% m/m (in nominal terms) in April, vs. 0.5% m/m in March. When factoring in inflation, the real month-over-month growth rate was 0.0% m/m. In year-over-year terms, real personal income rose 1.8% in April, vs. 1.7% in March. Meanwhile, real disposable personal income (which is personal income less taxes) fell by 0.1% m/m, vs. up 0.1% m/m in March. Finally, the personal savings rate remained at 3.6% of disposable personal income, vs. an average of 7.4% in 2019.

Interest Payment Details

Nominal personal interest payments (PIP), which represent nonmortgage interest paid by households, rose by 0.7% m/m in April, vs. -0.7% m/m in March. In year-over-year terms these payments are up 13% (vs. a peak of 66.5% y/y in June 2023). Consumer’s increased reliance on debt, and specifically credit card debt, and the surge in interest rates over the last two years are responsible for these gains. As of April, PIP accounted for 2.4% of overall Disposable Personal Income down from a peak of 2.8% in Sep 2023.