– by New Deal democrat
Last month I concluded: “This was a very weak report, although not negative. If there were not distortions from the front-running of tariffs earlier this year, it would come very close to meriting a ‘recession watch.’ But by next month, the payback from this previous front-running should have largely abated. If there is a rebound, needless to say that will be good. But if the weakness persists, we may cross the threshold. As it is, because of this uncertainty a ‘yellow flag’ caution, ie., pay extra close attention, is merited.”
This month we indeed got the answer. The “payback” for front-running did abate, and there was a rebound across all the data, meaning the yellow flag can be removed for now.
Nominally income rose 0.4% and spending 0.5%. Since the PCE inflation gauge only rose 0.2%, real income increased 0.2% and real spending rose 0.3%. Real personal income is below only April’s outlier, while real spending set a new record.:
[Note: with the exception of the personal saving rate, and one YoY graph, all of the data in the below graphs is normed to 100 as of just before the pandemic.]
Since real spending on services (blue, right scale) rarely turns down, even in recessions, the focus is on goods (red, left scale). In July they rose a strong 0.9%, also to a new record high:
Additionally, there is authority for the fact that spending on durable goods usually cools risk before spending on non-durable goods. In July, this rose 2.0%, but the absolute level remained below that of March and April, as well as last December:
While this is positive, the YoY trend shows considerable deceleration, as at 3.2%, it is no better than the level last summer:
One way to differentiate between noise and trend is to look at the YoY comparisons.In general while real income and spending do not turn negative YoY until after a recession has started, usually they have declined 50% or more from their YoY peaks within the previous 12 months (e.g. a decline from up 4.0% YoY to being up 2.0% YoY). After the improvements this month, total real spending as well as real spending on goods are nowhere near this threshold, but as shown above real spending on durable goods is very close, as measured on a three month average basis, it is down -49% from +6.2% YoY to 3.2% YoY.
Next, here is the personal savings rate. I follow this because just before and going into recessions it tends to turn up as consumers get more cautious. In July it remained steady at 4.4%, in line with its typical reading this year:
Finally, let’s take a look at two coincident indicators from this report which the NBER pays close attention to in dating recessions. First, here is real income less government transfers:
This rose 0.3%, reversing the declines in the two previous months. It is now higher 1.6% YoY, and less than -0.1% below its April all-time high. Last month it was on the cusp of being recessionary. With this month’s improvement, the trend this year has stabilized, although over a longer time period, the deceleration that started last year has persisted.
Second, here is real manufacturing and trade industries sales, which is delayed one month and so if for June:
This rose 0.3% for the month, and the upward trend since 2022 is intact, although this remains below April and May levels.
On an YoY basis this is also up, by 3.1%, in line with the trend in 2024 before tariff front-running came into play:
While both coincident indicators are below their spring peaks, I am not concerned that they signal a present recession, since the leading indicators would turn down first, and they have not done so.
In conclusion, as I said above, last month’s yellow caution flag can be removed, as all components rebounded, some to new all-time highs. There was no consumer retrenchment in savings, and real goods sales improved as well. The only ambiguous measure was real spending on durable goods, which typically is the first area where a downturn would be seen, and even there the more pessimistic reading is flatness rather than down.
