The consensus read on August’s personal income and outlays data is broadly reassuring: spending is up, the consumer is resilient. Real personal income in August, however, fell 0.1 percent on the month, and that gap between what Americans earn and what they are spending deserves more attention than the headline PCE figure is getting.
What the Real Personal Income August Numbers Actually Show
According to the U.S. Bureau of Economic Analysis (BEA), personal income rose $66.6 billion (0.2 percent at a monthly rate) in August. Disposable personal income (personal income after current taxes) increased $68.6 billion, or 0.3 percent. So far, so unremarkable. The inflation adjustment is where the picture sours: real personal income declined 0.1 percent, meaning purchasing power contracted even as the nominal figure edged upward.
Against that backdrop, personal consumption expenditures (PCE) rose $190.8 billion, or 0.9 percent in current-dollar terms. Real spending, once stripped of price effects, rose 0.6 percent. The BEA breaks that $190.8 billion increase down further: $114.1 billion came from goods spending and $76.7 billion from services. Goods drove the majority of the nominal move, which matters when you consider that goods prices have been the more volatile component of the PCE price index.
On that index: the overall PCE price measure rose 0.3 percent from the preceding month and 3.4 percent from a year earlier. Excluding food and energy, core PCE rose 0.2 percent month-on-month and 3.0 percent year-on-year. Those figures sit comfortably above the Fed’s 2 percent target, and they sit there while real incomes are moving in the wrong direction.
Wages Held Up, But That Is Not the Full Story
PNC Economics Research notes that wages and salary income rose 0.3 percent in August, which provides some support to the idea that labour income held up during the month. The consensus will point to that number as evidence the consumer has a genuine income base underpinning the spending surge.
The problem is that wages rising 0.3 percent in nominal terms, against a PCE price index also rising 0.3 percent, leaves real wage growth roughly flat. Workers were not getting ahead in August; they were treading water. That is a different story from the one the nominal PCE print tends to generate.
The more uncomfortable read is that the spending surge is not being funded by income growth. The popular explanation, and one that MishTalk has flagged, is that a buoyant equity market is sustaining consumption among asset-owning households, while households further down the wealth distribution are drawing down savings or extending credit. Consumer confidence data released in late September appeared to show exactly that kind of bifurcation: present-situation and future-expectations indices both fell, even as aggregate spending rose.
Bifurcated consumer behaviour is difficult to read from aggregate figures alone. The top-line real PCE gain of $92.8 billion, or 0.6 percent, according to the BEA, looks healthy until you ask who is doing the spending and what they are funding it with. An aggregate that blends wealth-effect consumption among equity holders with credit-funded or savings-depleting consumption among wage earners is not a stable foundation. It is two different economies wearing the same data.
The consensus may be overweighting the goods-spending surge as evidence of broad-based consumer strength. A 3.4 percent year-on-year PCE price index, with real incomes negative on the month, points toward a narrowing cushion for households whose balance sheets are not supported by financial assets. The spending number is real; the question the data does not answer is how much longer it can stay that way if real incomes keep contracting. The BEA’s next monthly release will be the first test of whether August was an anomaly or a pattern forming.
