The Two Stories Behind May’s PCE Report

The May PCE report tells two stories depending on how far you read.

Income up 0.7%, spending up 0.7%, GDP revised up to 2.1% for Q1. Those numbers landed well.

But the income gain was driven largely by a one-time USDA disaster relief payment – not wages, not organic growth. The spending gain had a significant energy component tied to Middle East conflict pricing. Real consumer spending rose 0.3% after a flat April. And the Q1 GDP revision came from trade normalization and a surge in business equipment investment – consumer spending was actually revised down, from 1.4% to 0.5%, with services demand nearly disappearing in the process.

Meanwhile, core PCE is running at 3.4% year-over-year. Highest since October 2023. Holding at 0.3% MoM for two consecutive months, well above the Fed’s 2% target.

Most institutions have already adjusted to a higher-for-longer rate environment. The less examined question is what this data implies for the consumer. Real spending growth is running at 0.3% against 3.4% inflation. Members are losing purchasing power – and that erosion tends to show up in credit and deposit behavior on a lag, after the macro data has already moved on.

The composition of May’s income and spending beats is worth understanding before taking the headline numbers into your next forecast round.

What are you seeing in your portfolios – is member behavior still tracking your baseline?