May 2018 Income and Outlays

May 2018’s iteration for income and outlays from the Bureau of Economic Analysis is one of the most interesting we have seen in a while.  Both components of the report improved, and consumers actually increased their savings rate, but none of that captured Atlas’ intrigue.  Instead, inflation data stole the show. 

Before delving into price data, let’s explore the other components.  After-tax income rose $63.2 billion or 0.4 percent.  All four major categories of income benefited in the period.  Wages and salaries rose 0.3 percent.  Proprietors did slightly better, improving 0.5 percent, but all of the gains went to nonfarm firms as farmers’ pay declined for a second consecutive month, dropping 6.3 percent in May.  Rental income improved 0.5 percent, and receipts on assets (dividends and interest) rose 0.7 percent. Personal consumption expenditures (PCE) grew just 0.2 percent in May.  Strong income growth accompanied by slower growing outlays left the economy with an improving personal savings rate of 3.2 percent (compared to 3.0 percent in April).

Price data were exciting for the first time in a while.  The Federal Reserve’s preferred measure of inflation is contained in this monthly release.  Their economists strip out food and energy from the PCE-price index (since they can be volatile for reasons not strictly economic) and look at the year-over-year trend in the remaining “core” measure.  Our central bank has been explicitly targeting 2.0 percent for the price proxy's twelve-month lookback, and it was reached for the first time since April 2012 in May.  Hitting this milestone is unlikely to create immediate changes in their approach to monetary policy but they will likely tighten more aggressively if this measure of inflation moves too far above its 2.0 percent tether.

America’s economy remains in an expansion.  Firms are continuing to hire which in turn helps incomes, outlays, and even a rising savings rate.  Inflation reached the Fed’s target for just the first time in six years, so the central bank will probably not apply substantially more pressure to the economy’s brakes right away.  More of the same is likely in the months ahead.