April’s personal income and expenditure report was a strong report for continued economic growth in 2022. Personal income growth was solid, there was a strong increase in consumer spending and the inflation slowed considerably during the month.
Personal income rose 0.4% in April compared to March, as personal after-tax (disposable) income rose 0.3%. There was a strong 0.6% increase in wages and salaries, thanks to job creation and rising wages during the month. Disposable income growth in March was revised down slightly, from 0.5% to 0.4%.
Consumer spending rose 0.9% in April. Spending on durable goods jumped 2.4%, while spending on non-durable goods fell 0.1% due to lower energy prices. Consumer spending on services rose 0.9%. Consumer spending growth in March was revised significantly upwards to 1.4% from the 1.1% initially reported.
With spending rising more than income, the personal saving rate fell to 4.4% in April from 5.0% in March (revised down from 6.2%). This is the lowest monthly savings rate since 2008. The personal savings rate has trended lower as the economy has reopened and households have spent their saved stimulus funds.
The personal consumption expenditure price index rose just 0.2% in April, the lowest monthly inflation since November 2020. The PCE price index jumped 0.9% in March with the spike in energy prices after Russia’s invasion of Ukraine. The core personal consumption expenditure price index, excluding volatile food and energy prices and the Federal Reserve’s preferred measure of inflation, rose 0.3%, the third consecutive monthly increase of this amount, after fluctuating between 0.4% and 0.5% from October 2021 to January 2022.
On an annual basis, headline PCE inflation was 6.3% in April, down from 6.6% in March. Headline year-on-year inflation in March was the highest since 1982. Core PCE inflation was 4.9% in April, down from 5.2% in March and 5.3% in February. The last time core inflation was this high was in 1983.
After adjusting for inflation, after-tax income was flat in April compared to March. Real consumer spending rose a very good 0.7% in April.
April’s personal income and spending report was very strong for near-term economic growth. Consumers continue to express concern about inflation, but so far rising prices have not led them to reduce their purchases. There were solid increases in both nominal and real consumer spending during the month. Revenue growth has been going well and keeping pace with lower inflation. Growth in wages and salaries was strong during the month, but a decline in self-employment income was a drag.
The personal savings rate continues to fall. It reached record highs in 2020 and early 2021 as government transfer payments boosted incomes and households drastically reduced spending during the early stages of the pandemic. The current savings rate is too low to persist indefinitely. But for now, households are now spending the roughly $2 trillion in excess savings they have accumulated over the past two years, and consumer balance sheets remain in very good shape.
Consumer spending gains will remain strong through 2022, although the pace of growth will slow. Strong job and wage gains, accumulated savings, low consumer debt and rising home values are positive for household purchases, while high inflation, rising interest rates and falling stock prices are negative. Spending growth will shift from goods to services as the economy continues to reopen and consumers continue to venture out. Large household purchases over the past two years and rising interest rates are also dampening spending on goods. The big exception will be motor vehicles; supply issues have weighed on sales, but as automakers resolve these issues and increase production, households will replace their older vehicles.
The slowdown in inflation is welcome, although headline inflation is expected to jump again on a monthly basis in May with another spike in energy prices. Inflation will likely peak year-over-year in the spring, but it remains well above the Fed’s 2% target.
PNC expects core PCE inflation to end this year at around 4% and next year at just over 2%. The Federal Open Market Committee will continue to raise the federal funds rate in an effort to slow economic growth and slow inflation. The federal funds rate will be around 2.5% at the end of this year and above 3% by mid-2023. The Fed hopes that the rise in interest rates will slow growth and calm inflation without pushing the US economy into recession. The risk of recession this year is low due to strong fundamentals, but is around 40% over the next two years due to the cumulative slowdown in Fed tightening.