American households entered the second half of the summer with incomes still growing faster than spending. Personal income increased 0.4% in July and disposable personal income rose 0.5%, according to the Bureau of Economic Analysis. Personal consumption expenditures increased 0.2%, leaving the personal saving rate at 3.0%.

That is a healthier monthly combination than one in which spending outruns income, but the saving rate remains a weak point. Households are still putting away a relatively small share of disposable income, which means consumer resilience depends heavily on continued wage and employment growth rather than on a large stock of new precautionary savings.

Services are taking a larger share of the wallet

The composition of spending was striking. Services spending increased by $86.2 billion at an annual rate, while spending on goods fell by $49.9 billion. Housing and utilities, healthcare, financial services and other recurring categories continue to absorb a growing share of household budgets even when discretionary goods demand softens.

That matters for retailers because a consumer can look healthy in aggregate PCE data while becoming more selective in stores. Walmart (WMT), Target (TGT) and Amazon (AMZN) are competing not only with each other but with rent, insurance, travel and healthcare for the next dollar of household spending. A strong services number is therefore not automatically bullish for every consumer company.

Income growth is doing the stabilising

Disposable income growing 0.5% in one month provides a buffer against that pressure. If income can continue to rise faster than prices, households can rebuild purchasing power without relying on credit. That is particularly important after several years in which inflation eroded real wage gains and forced consumers to adjust the mix of what they bought.

The risk is that income growth slows at the same time as recurring service costs remain sticky. A 3% saving rate offers less room to absorb a labour-market shock than the much higher saving rates recorded during the pandemic period. The consumer is not fragile, but neither is the household sector sitting on an unlimited reserve of fresh cash.

The Fed will care about prices inside the spending data

The Federal Reserve watches the personal consumption expenditures price index closely because it captures a broad set of household expenditures and allows weights to change as consumers substitute between products. The July income-and-spending release therefore matters for policy through both demand and inflation.

Strong income with moderate spending is broadly helpful for disinflation. Policymakers would be more concerned if spending accelerated sharply while the labour market remained tight. The current mix gives the Fed room to focus on whether service-sector inflation is cooling without needing to engineer a collapse in household demand.

The consumer story is becoming more uneven

The headline consumer remains capable of supporting growth, but the underlying picture is increasingly segmented. Higher-income households with financial assets have benefited from strong markets, while lower-income households are more exposed to rent, food, insurance and revolving credit costs. Aggregate spending can conceal that divergence for a long time.

For businesses, July’s data argue against both extremes. There is no evidence of a broad consumer retrenchment, but there is also little justification for assuming households can absorb unlimited price increases. Companies with the strongest value proposition are likely to keep taking share while the saving rate stays this low.