Americans are saving and earning less. But they won’t stop spending

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Americans saw income growth that slowed to a crawl in July, but their spending rate decidedly did not.
Americans are saving less to continue spending robustly, even as income growth slows—telling us something important about the economic currents that will shape the next year. If it continues, that dynamic will prevent a recession from taking hold, though at the cost of leaving household balance sheets more fragile.

Driving the news: Personal income rose 0.2% in July, the Commerce Department said Thursday. Disposable personal income—what people made after taxes—was flat for the month and down 0.2% after accounting for inflation.

Yet spending still roared ahead, rising a brisk 0.8% (0.6% in inflation-adjusted terms).
By the numbers: The personal saving rate fell to 3.5% in July, down from 4.3% in June and 4.7% in May.

Immediately before the pandemic, savings rates were much higher, averaging 8.8% in 2019.
The intrigue: An important question for the economy in the months ahead is whether robust spending growth will continue to prop up the overall economy, even as the labor market softens and income growth flatlines.

What they’re saying: “Consumers spent freely in July even if it meant dipping into their savings amid slower income growth,” said EY-Parthenon chief economist Greg Daco in a note.

“While consumer spending was undeniably strong in the early summer, we anticipate the trend will slow in August and September as elevated prices for goods and services, higher borrowing costs and moderating income limit consumers’ spending appetite,” Daco said.

“We don’t anticipate a retrenchment in spending, but rather cooler spending momentum” with year-over-year growth slowing from around 3% to 1.5%.

Meanwhile, inflation numbers released alongside the income and spending data point to continued moderation in price pressures, in line with what Federal Reserve officials want to see as they weigh whether to raise rates further.