U.S. Personal Income Reverses Large May Gain While Savings Rate Tumbles

As "automatic stabilizers" vanished, June personal income reversed all of the prior month's jump with a 1.3% decline. Government payments to individuals dropped 6.0% as "other" stimulus payments reversed the May gain with a 16.5% decline (-7.3% y/y). As might be expected, wages & salaries, remained under pressure with the weak job market. The 0.4% decline from May was the ninth decline in the last ten months (-4.7% y/y). In the goods producing industries, wages have been particularly hard hit and are down 11.4% y/y. In addition, the decline in interest rates has taken its toll on interest income which in June was off 3.7% y/y while fewer dividends were paid by the corporate sector (-24.4% y/y). These latest figures reflect benchmark revisions which generally lowered income and the June decline roughly matched Consensus expectations for a 1.0% drop.

With lower income came lower taxes. Tax payments fell 1.5% last month and they were down by nearly one-quarter since December. Nevertheless, disposable personal income fell 1.3% last month. So far this year disposable income has risen at a 1.7% annual rate which very much reflects sharp downward revisions to earlier figures. Adjusted for inflation, real disposable income also reversed the May gain and fell 1.8%. Revisions dropped growth in real take-home pay to a negative 0.4% since December whereas earlier figures showed firm growth.

Whatever it takes, consumers have attempted to rebuild their balance sheets. Though the personal savings rate backpedaled last month with the income drop, the 4.6% figure was near the highest since 1998 despite the downward income revisions.

Restraint on spending has driven the rise in savings. June personal consumption expenditures about matched expectations and rose just 0.4%. They are up 2.5% at a annual rate so far this year. However, that growth largely reflects the rise in gasoline prices. Adjusted for inflation, June spending slipped 0.1% and so far this year it is up at just a 0.4% annual rate. (The details behind this restraint will be available later this week.)

Pricing power continues to held back by sluggish spending. The PCE chain price index rose 0.5% last month, largely due to the rise in energy prices. Less food and energy prices rose just 0.2%. Combined with weakness during prior months, the y/y gain in core prices dropped to 1.5% which was its lowest since 2003. The latest increase in prices matched Consensus expectations.

The personal income & consumption figures are available in Haver's USECON and USNA databases.

Bank Supervision is today's Senate testimony by Fed Governor Daniel K. Tarullo and it can be found here.

The rebound in housing activity grew stronger last month as mortgage rates remained low. The National Association of Realtors reported that June pending sales of existing homes jumped 3.6% from May to their highest level since June of 2007. The gain easily outpaced Consensus expectations for a slight 0.6% increase in monthly sales.

Home sales rose last month in each of the country's regions, but they surged in the South and the West. In the South, sales jumped 7.1% m/m to lift them nearly nine percent from June of 2008. In the West, sales also were strong and posted a 7.1% gain. Though strong last month, sales have meandered sideways for the last year. In the Northeast, sales ticked up just 0.4% from May. That followed strong gains during three of the prior four months and left them at their highest in two years. Finally, sales in the Midwest also rose but by a slight 0.8% m/m; nevertheless, they were at their highest level since 2007.

These home sales figures are analogous to the new home sales data from the Commerce Department in that they measure existing home sales when the sales contract is signed, not at the time the sale is closed. The series dates back to 2001.

The latest monthly gains in home sales have been accompanied by improvement in prices. The median sales price of an existing home increased 4.1% in June (-15.4% y/y) and prices have risen 7.1% since December. That latest increase reduced the affordability index of a home but it nevertheless remained up by 29.9% year-to-year and by three-quarters from the 2006 low. The median price of an existing home rose to $181,600 (-15.0% y/y) and the average mortgage rate was 5.2%, down from 6.3% one year ago.

The Realtors Association indicated in an earlier report that the number of homes on the market and available for sale slipped m/m and was down 14.9% versus one year earlier. At the current sales rate, there was a 9.4 months' supply of homes on the market which was near the lowest since June 2007. However, it still was up from the 8.9 months supply during all of 2007 and 6.5 months during 2006. At the high, there was a 10.4 months supply during all of last year.

The pending home sales data are available in Haver's PREALTOR database. The number of homes on the market and prices are in the REALTOR database.

The economy must be improving if gasoline prices are rising. Or is it seasonal strength? The pump price for regular gasoline increased last week to an average $2.56 per gallon, though that still was down a nickel from last month's high. The increase added to the nearly one dollar (59%) rise from the December low. Yesterday, however, the pricing strength was even more evident with the twenty cent jump to $2.03 per gallon in the cash market price. Gasoline prices were up off the early-July low of $1.60. The figures are reported by the U.S. Department of Energy and can be found in Haver's WEEKLY & DAILY databases.

Crude oil prices also have strengthened. Light sweet crude oil prices (WTI) increased to $67.23 per barrel and they've roughly doubled this year. Yesterday the spot market price for light sweet crude oil rose further to $71.58 per barrel. Prices had reached a daily high of $72.68 earlier in July.

The pickup in energy prices is against the backdrop of a firming demand picture. It probably is seasonal, but during the last four weeks the demand for gasoline is up sharply. Year-to year, demand still is down by 1.8%, but that compares to a nearly 5% rate of decline last fall. Demand for distillate also is off sharply though residual fuel oil demand has moved higher. Finally, oil remains plentiful as evidenced by a 13.0% y/y rise in inventories of crude oil & petroleum products. Inventories of gasoline are flat y/y but crude oil inventories less the SPR are up by 17.8%. The figures on crude oil production and inventories are available in Haver's OILWKLY database.

Natural gas prices continued their move sideways last week. At an average of $3.44 per mmbtu (-62.8% y/y), the price was down by three-quarters from the high reached in early-July of last year of $13.19/mmbtu.

EMU producer prices (x-construction) ticked up in June but are still falling at an accelerating pace Year-over-year. Sector prices are weak and falling across the board on all horizons but the rate of descent is not gathering momentum overall or by sector. In the end that is the really good news.

Germany shows prices falling over three-months at about the same pace they are falling over six months, both of which are at a faster pace of decline than year-over-year. But core German prices, Italian prices and UK prices, in particular, are not showing any continuing deceleration: declines yes, but decelerations, no. In the UK PPI prices have started to rise. In Italy the down turn has abated and there is one month in which the PPI headline rate has risen (June). German trends are marked by still declining headline and core rates even monthly, but the move down is not accelerating.

In short inflation appears to be contained and deflation does not seem to be in the cards on a sampling of big picture EMU sector news and smattering of country-level reports. Lingering economic weakness is probably having this extended impact in depressing prices.

The official policy interest rates in both Australia and New Zealand have been unchanged since May of this year--Australia at 3% and New Zealand at 2.5%, as can be seen in the first chart. In recent news releases, Glenn Stevens, the Governor of the Bank of Australia, hinted that the next move might be an increase while Alan Bollard, Governor of the Bank of New Zealand would not rule out further reductions.

Typical of the cross currents affecting these economies are today's updates of the Haver data bases for the two countries. In Australia, retail sales were down slightly in June, but on a quarterly basis, the second quarter was 2% above the first quarter and almost 8% above the second quarter of 2008. An index of house prices of established homes in eight capital cities increased 4.2% in the second quarter from the first quarter of this year and was only 1.4% below the value of the index in the second quarter of 2008. The quarter to quarter changes in retail sales and house prices are shown in the second chart.

In New Zealand wages and salaries are still rising, both for ordinary hours and for overtime, but the rate of increase has declined in the past few quarters, as shown in the third chart. Employment continues to decline and was 0.75% lower in the second quarter than in the first quarter and more than 3% lower than the second quarter of 2008. Part Time and Full Time employment trends are shown in the fourth chart.