Pace of consumption growth will inevitably slow

The news that real personal spending increased by 0.3% m/m in June, along with the reported surge in auto manufacturers’ unit sales in July, implies that real consumption growth began the third quarter on a strong note. Digging deeper, however, the fundamentals have deteriorated over the past several months. Indeed, the second-quarter surge was driven almost entirely by a sharp decline in the savings rate, which means that there is now much less scope for households to draw on their savings. This means that real consumption growth will need to grow more in line with real incomes in the second half of the year. Unfortunately, as payroll gains gradually slow and wage growth picks up only modestly, we don’t forsee any big rebound in income growth. Accordingly, we think real consumption growth will ease to between 2% and 2.5% over the second half of the year.