Personal income grew 0.3% month-on-month (m/m) in September, a deceleration from August’s 0.4% and just below market expectations for 0.4% growth.
Accounting for inflation and taxes, real personal disposable income fell -0.1% m/m, following a similar decline in the previous month.
Personal consumption expenditures rose 0.7% m/m, accelerating from the 0.4% posted in August. September’s reading came in above market expectations for 0.5% growth.
- Expenditures on services grew 0.8% m/m, reflecting higher spending on other services (international travel), housing and utilities, health care and transportation services (led by air transportation).
- There was also an increase in goods spending (up 0.7% m/m) reflecting a gain of 0.5% in non-durable goods spending (prescription drugs) and 1% in durable goods spending (led by new motor vehicles).
Adjusting for inflation, real spending grew 0.4% for the month, coming in just above consensus estimate for a 0.3% gain. In real terms, goods and services spending were up 0.5% and 0.3% respectively.
Headline personal consumption expenditure (PCE) inflation rose 0.4% m/m, and was steady at 3.4% on a year-on-year (y/y) basis. However, the core PCE price deflator (which excludes food and energy and is the Fed’s preferred measure of inflation) accelerated to 0.3% m/m, from a soft 0.1% in August. However, on an annual basis, core PCE inflation decelerated to 3.7% from 3.8% the month prior, and on a three month annualized basis was 2.5% in September, suggesting core inflation should cool further in the coming months..
As spending growth outpaces income gains, the personal savings rate fell to 3.4% in September, down 0.6%-pts from August’s 4% reading, and the lowest level this year.
Key Implications
U.S. consumer spending closed out the third quarter on solid footing. Despite mounting headwinds, the consumer more than did their part to buoy the economy with real consumption expenditure growth clocking in at 4.0% annualized for Q3. However, with real disposable income declining for three straight months and headwinds growing, the likelihood that the consumer will be able to keep up the same pace in Q4 is dubious. As such, a deceleration in consumer spending to below 2% is expected in the final quarter.
Turning to movements in prices, today’s core PCE number headed in the right direction to support the Fed’s current wait-and-see stance. The fact that our measure of non-housing service inflation (aka “supercore”) held steady at 4.2% y/y was promising, though the jump in the 3-month annualized change to 4.2% (from 3.2%) was not. Nevertheless, the central bank is unlikely to have been surprised by the strength of consumer spending during the summer. The more relevant question is whether the trend can continue in coming quarters and its impact on inflation – a topic sure to be discussed at the upcoming FOMC meeting next week. Despite the bump in consumer spending (and GDP), with the Fed’s preferred measure of inflation continuing to head lower in September, market pricing continues to favor the Fed holding rates steady next week.
