Via Millan Mulraine at TDSecurities:
TD SECURITIES DATAFLASH
US: Consumption Activity Rebounds Strongly in Q2
· After slowing markedly in recent quarters, personal consumption rose at a solid 1.0% m/m pace in April, signally a strong GDP rebound this quarter.
· Real spending posted an equally impressive 0.6% m/m advance, while the pace of core PCE inflation advanced at a relatively firm 0.2% m/m pace.
· The strong PCE performance and continued progress on inflation will likely lift the odds of a July hike, though we would need to see further confirmation in other data before any consideration of changing our current call for a September move.
Personal spending rose at a solid 1.0% m/m pace in April, bettering the market consensus for a slightly more solid 0.7% m/m gain. The impressive nominal spending rebound translated into an equally solid performance in real personal consumption activity, which advanced at a healthy 0.6% m/m pace. This marks the strongest monthly gain in this indicator since February 2014, and the surge in spending momentum in April is an early indication of a solid 3.5% q/q performance in PCE this quarter, which keeps Q2 GDP on track for a 3.0% q/q or better showing. Income was up at a relatively modest 0.4% m/m pace, and with disposable income rising at 0.5% m/m the surge in spending was funded by a drawdown in savings, with the savings rate dipping to 5.4% from 5.9%.
The rise in spending was driven by the 2.3% m/m advance in durable goods purchases, with spending on nondurables (up 1.4% m/m) and services (up 0.6% m/m) rising at a more modest pace. The rebound in personal expenditures momentum reflects a strong reversal of the sluggish performance earlier this year, and the 3M annualized pace of PCE accelerated to a very respectable 3.0% pace from 2.2% at the end of the last quarter. On the inflation front, the core PCE index rose at a 0.2% m/m pace (up 0.171% at 3 decimal places), underscoring the continued firming in the underlying inflation backdrop. On an annual basis, the PCE inflation rate remained unchanged at 1.6% y/y.
The overall tone of this report was very constructive, and the solid rebound in spending will likely be interpreted at the Fed as a key indication that the economic recovery has regained its footing after the missteps over the past three quarters. From a GDP accounting perspective, the strong start to the quarter puts the Q2 GDP tracking on a path towards a decent 3.0% q/q or better performance. In terms of the Fed, the strong PCE performance and continued progress on inflation will likely lift the odds of a July hike, though we would need to see further confirmation in other data before any consideration of changing our current call for a September move.