Comment on June Personal Income & Outlay data and the Q2 2021 Employee Cost Index  – Erik Lundh, Principal Economist, The Conference Board & Gad Levanon, Vice President, Labor Markets, The Conference Board

June Personal Income & Outlay data and the Q2 2021 Employee Cost Index, both released this morning, show an economy that is continuing to recover while pushing against supply constraints.

According to the second quarter Employment Cost Index report, wages and salaries for private industry workers increased at a 3.9 percent annual rate for the 3-month period ending in June 2021. For the 6-months ending in June 2021, the growth rate was 4.3 percent, the fastest in over 20 years. Much of the acceleration comes from wages and salaries of blue collar and manual services occupations, while wage growth for management and professional occupations remains below three percent (see chart below).  The latest responses to the question about the difficulty finding a job from The Conference Board’s July Consumer Confidence Survey suggest that the labor market remains historically tight in July, and significant wage pressures are likely to continue building through the summer. Strong wage growth will boost consumer purchasing power and confidence, but at the same time contribute to inflationary pressures and squeeze corporate profits.

Meanwhile, according to Personal Income & Outlays data, overall personal income rose 0.1 percent (in nominal terms) month-over-month (m/m) in June as lower government transfers were offset by continued improvements in other kinds of income – including employee compensation.  Strong employment gains and wage growth are likely to continue to boost this critical aspect of personal income over the coming months.

Personal consumption expenditures rose 1.0 percent m/m in June and the lopsidedness seen in spending on goods and services continued to become more balanced. Spending on services rose by 1.2 percent m/m while spending on goods rose by 0.5 percent m/m. Robust service spending growth was driven by transportation services (up 4.8 percent m/m), recreation services (up 2.2 percent m/m), and food services and accommodations (up 3.0 percent m/m). Notably, spending on durable goods declined 1.5 percent m/m while spending on non-durable goods rose 1.8 percent m/m. This trend is likely to continue over the coming months as pent-up demand for services crowds out spending on goods.

Finally, PCE inflation appeared to be peaking in June. Headline PCE inflation was 4.0 percent year-over-year (y/y) in June, vs. 4.0 percent y/y in May. The BEA also reported that Core PCE Inflation rose slightly to 3.5 percent y/y in June, vs. 3.4 percent y/y in May. Critically, the month-over-month growth rates for these key inflation metrics were all either flat or falling. Headline PCE inflation was 0.5 percent m/m in June, vs. 0.5 percent m/m in May and Core PCE inflation was 0.4 percent m/m in June, vs. 0.5 percent m/m in May. While elevated year-over-year inflation rates are likely to persist through 2021 and into 2022 due to base effects, the month-over-month inflation rates seen in June suggest that the period of peak inflationary momentum may have passed. However, if inflation remains persistent the Fed may raise rates sooner than expected which would slow the recovery - especially in sectors sensitive to interest rate changes, like housing.