The U.S. May personal income report was not strong despite a 1.4% surge in personal income; it confirms that gross domestic product is probably declining through the second quarter.

May personal income’s 1.4% gain was the largest since a May 2008 surge, and reflected $157.6 billion in extra transfers under the stimulus plan. The American Recovery and Reinvestment Act of 2009 reduced personal taxes and increased government outlays by making one-time $250 payments to retirees. The Commerce Department estimated without these changes, disposable personal income would have been up 0.2%, not the 1.6% gain that was reported.

Proprietors’ income, rents, and income receipts rose. But the key component of income, private wages and salaries declined $12.4 billion, as only services and government pay rose. Private wages dropped $0.7 billion in April. This pattern suggests underlying ­weakness.

Personal consumption expenditure posted a 0.3% gain. Core PCE prices up 0.1% for up 1.8% over the year, and is showing little movement. Real PCE advanced 0.2% in May and the April-May average stands about $10 billion below the first quarter average, confirming another drop in consumption and probably in second quarter GDP.

The response to the increased government payments and lower salaries has been increased savings rather than spending. The monthly savings rate was 6.9%, the highest since December 1993, and the savings level of almost $769 billion was the highest since records began in 1959.

May’s real spending pattern showed rebounds in durables and nondurables — but only to early spring levels — and down 0.6% in services. Rising gasoline prices no doubt hurt the consumer. All in all, this was not a strong report despite a headline surprise.

— Market News International

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