July Income was flat vs expectations of a gain of .1% but June was revised higher by .2% to a decline of 1.1%. Spending rose .2%, in line with forecasts and June was revised up by .2%. Because the headline PCE was flat, REAL spending rose by .2% (vs .1% gain in June) and with flat income, the Savings Rate fell to 4.2% from 4.5%. Over the past 30 years, the Savings Rate has averaged 5.6% and before 1995 it averaged 7.7%. Headline PCE fell .8% y/o/y and is negative for a 3rd straight month. The core PCE though rose .1% m/o/m and is up 1.4% y/o/y, the lowest since Sept ’03 but it clearly didn’t get to the deflationary levels that headline PCE has achieved. This highlights the impact that commodity prices have had on inflation just within the past year. Bottom line, Q3 GDP will see positive growth but the contribution from the consumer side will be muted as income growth remains lacking.

Who would have thunk that in ’06, SNL would reveal that something was amiss at the height of the credit bubble, . Saving is the new cool and having credit card debt is so passe. This transition is not a multi Q process but multi year and it has implications for US economic growth for years to come. Our economy will be for the better though in time as exports and investment eventually pick up the slack as we can better finance our growth with savings and less on debt. Even if consumers wanted to pick up their spending in the face of weak income growth, they can’t as access to credit remains crimped. Credit drove our economy on high speed for 10 years. We’ll get a rebound but it won’t be sustainable until we save more and export more.

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