Personal income is on a worrisome path

Americans' personal income fell 4.2% last month, which was better than expected, but remained supported by increased government spending on unemployment benefits, food stamps and other generalized welfare payments that are all at never-before-imagined highs.

Why it matters: Personal spending ticked up, largely supported by one-time CARES Act direct payments, with personal income excluding government transfers up 1.5% from April.

• However, disposable income fell 4.9%, suggesting that the U.S. household remains impaired despite millions being recalled to work.

By the numbers: Personal income was up 7.0% as of May, but wages and salaries were down 5.4% year over year, with government transfers still up 67.5% from their May 2019 level (but down from an increase of 90.1% in April).

• Importantly, proprietor income rose 2.8% in May, month-over-month, after being down 12.7% in April, suggesting small businesses are starting to come back online.
• Consumption was driven by a 28.4% increase in spending on durable goods, with new and used autos up 40.8%, and other durables up 24.5%.

What we're hearing: "The collapse in spending on discretionary services, mostly leisure, recreation, and food service, is the drag here," notes Ian Shepherdson, chief economist at Pantheon Macroeconomics.

• "June spending will be much stronger, but we’re worried that July and August could see a relapse, led by a consumer retreat in the South and parts of the West, in the face of the surge in COVID infections."

The big picture: "It is clear that following the one-time bounce in spending observed this month, income and savings dynamics are moving in a direction that suggests that a general paradox of thrift has, for now, captured wealth households," Joe Brusuelas, chief economist at RSM, wrote in a note to clients.

Go deeper: Coronavirus lockdowns heighten income inequities of school-from-home