Personal Spending Ends The Third Quarter on a Soft Note

Overall personal consumption outlays declined 0.2 percent. The drop, combined with a modest 0.1 percent rise in after-tax income, pushed the saving rate up to 5.6 percent. Inflation also came in below expectations.

Consumers Took a Breather in September

Consumer spending came in well below expectations, even after earlier reports on September retail sales had reduced expectations for the month. Overall outlays fell 0.2 percent, both on a nominal and real basis. The PCE deflator rose 0.1 percent during the month but the prior month’s figure was revised down from a flat reading to a 0.1 percent drop. 

The real, or inflation-adjusted, spending numbers are what matters most for the economic outlook. Overall outlays fell 0.2 percent but still ended the quarter slightly above the third quarter average. Consumer confidence picked up in October, which suggests the pace of spending also improved. Real outlays are likely to get a boost from lower gasoline prices, which are thought to be a big reason behind the 5.5-point jump in consumer confidence last month. Real personal consumption increased by an average of 0.14 percent per month through the first nine months of this year. If we were to maintain that pace over the next three months, spending would rise at a 1.2 percent annual rate during the fourth quarter. That strikes us as a bit low given the recent drop in gasoline prices and improvement in employment conditions should allow spending to rise a little faster than that. If spending were to rise 0.2 percent per month, or nearly one-third higher than it has on average this year, personal consumption would rise at a 1.7 percent pace in the quarter. No matter how you slice it, consumer spending looks set to increase at a fairly modest pace this quarter.

A Hint of Deflation in the Air?

The personal consumption deflator rose 0.1 percent in September, but the prior month’s unchanged reading was revised down to a 0.1 percent decline. One month’s decline does not qualify as deflation but the new figures did pull the year-over-year change in the overall PCE deflator down a notch to 1.4 percent. Much of the August drop was concentrated in energy prices, which plunged 2.7 percent. Energy prices fell an additional 0.8 percent in September. The market-based PCE deflator, which excludes imputed prices, also fell 0.1 percent in August and the market-based measure of core prices was unchanged for the month. On a year-over-year basis, both the overall and core market-based PCE deflator measures are now up just 1.3 percent. 

Thelower inflation readings bolster the Fed’s credibility a bit in that the Fed leadership never gave into the concerns about the blip in the Consumer Price Index earlier this year. More importantly, the lower inflation readings mean that wages and salaries, which rose 0.2 percent in September and are up 5.1 percent year-to-year, should go a little further this holiday season. With employment conditions improving and the saving rate back up, there seems to be plenty of fuel in the tank for a solid holiday shopping season.