Rebounding real incomes to support consumption

After a year-long contraction in real disposable incomes, the sharp declines in energy prices over recent weeks are finally providing some relief. Alongside continued strong employment growth, we calculate that the drop in retail gasoline prices to below $4 per gallon, from a peak of above $5, helped drive a solid rebound in real disposable incomes in both July and August. The strength of underlying retail sales in July indicates that this is supporting spending on non-energy goods and services, with third-quarter GDP growth on track to rebound by more than 2% annualised. That will ease concerns that a recession is imminent and, with officials focused on stubbornly high core inflation rather than energy-related declines in the headline rate, it will keep the Fed on track to raise interest rates into restrictive territory.