The personal income and spending report showed a larger than expected number, while the inflation indicator came in below market consensus. Analysts at Wells Fargo see a transition to discretionary spending clearly underway. They point out the days of stimulus checks and buying stuff are gone.

Key Quotes: 

“Personal income increased 0.1% in June and spending increased 1.0%; both numbers exceeded consensus expectations. Some of the fanfare of today’s better-than-expected outturn was uncorked in yesterday’s initial estimate for GDP growth.”

“For the third consecutive month, every major category of services spending moved higher. We also reached a milestone on the road to recovery as June marked the first month that services spending finally crested above its pre-pandemic level; in fact services spending is half a percentage point higher today than it was before the pandemic.”

“Last March and April, discretionary spending plummeted 54%, and has been clawing its way out on trend ever since. The transition to stronger spending here was evident in June as discretionary services rose 3.2% compared to a 0.5% gain in non-discretionary categories. That puts the peak-to-current figure at just 7.2% below their pre-pandemic level.”

“Personal income growth would have been stronger if it were not for dwindling stimulus. While overall personal income only rose 0.1% in June, if excluding transfer payments, income rose a stronger 0.7% over the month.”

“Still the overall trajectory of income growth will likely be flat to slightly down over the next four months or so. The confluence of factors from the expiration of all enhanced unemployment benefits in early September and PPP loans rolling out of proprietors income will more than offset upward momentum from employee compensation and the enhanced child tax credit being sent to many households. But, once stimulus rolls out of the income calculations, we expect income growth to settle on a more normal upward trajectory.”