Updated Sep 3, 2023 - Economy

Americans are saving and earning less. But they won't stop spending.

Illustration of a dollar on a balance being pushed down by one hand away from another

Illustration: Sarah Grillo/Axios

Americans saw income growth that slowed to a crawl in July, but their spending rate decidedly did not.

Why it matters: Americans are saving less to continue spending robustly, even as income growth slows — telling us something important about the economic currents that will shape the next year.

  • If it continues, that dynamic will prevent a recession from taking hold, though at the cost of leaving household balance sheets more fragile.

Driving the news: Personal incomes rose 0.2% in July, the Commerce Department said Thursday. Disposable personal income — what people made after taxes — was flat for the month and down 0.2% after accounting for inflation.

  • Yet spending still roared ahead, rising a brisk 0.8% (0.6% in inflation-adjusted terms).

By the numbers: The personal saving rate fell to 3.5% in July, down from 4.3% in June and 4.7% in May.

  • Immediately before the pandemic, savings rates were much higher, averaging 8.8% in 2019.

The intrigue: An important question for the economy in the months ahead is whether robust spending growth will continue propping up the overall economy, even as the labor market softens and income growth flatlines.

What they're saying: "Consumers spent freely in July even if it meant dipping into their savings amid slower income growth," said EY-Parthenon chief economist Greg Daco in a note.

  • "While consumer spending was undeniably strong in the early summer, we anticipate the trend will slow in August and September as elevated prices for goods and services, higher borrowing costs and moderating income limit consumers' spending appetite," Daco said.
  • "We don't anticipate a retrenchment in spending, but rather cooler spending momentum" with year-over-year growth slowing from around 3% to 1.5%.

Meanwhile, inflation numbers released alongside the income and spending data point to continued moderation in price pressures, in line with what Federal Reserve officials want to see as they weigh whether to raise rates further.

  • July core Personal Consumption Expenditure prices rose 0.2% for the second straight month, continuing a deceleration compared to 2022 and earlier this year.
  • Over the last three months, core PCE inflation has risen at a 2.9% annual rate, down from a 3.3% rate in the three months ended in June.

The bottom line: Income growth is slowing, and inflation is moderating. The question for the economy is whether — or when — a consumer spending pullback ensues.

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