Personal Spending Stronger than Expected So Far in Q3

Personal spending rose 0.5 percent in August following an upwardly revised flat reading in July. On net, the report suggests firmer consumer spending in Q3. Personal income climbed higher as wages and salaries rose.

Real Consumer Spending Remains on Track

The storyline from last month’s personal income and spending release was an increased concern of softer real consumer spending in the third quarter. Today’s release indicates that last month’s storyline may not be accurate in light of the upward revisions to spending growth. While nominal spending climbed 0.5 percent in August, real spending also rose a robust 0.5 percent, more than offsetting the 0.1 percent decline in real spending observed in July. Given these stronger readings, there appears to now be some upside risk to our 2.1 percent real consumer spending forecast for the third quarter. Durable goods spending climbed 1.8 percent for the month, reflecting the strong pace of auto sales. Nondurable spending fell 0.3 percent, while spending on services bounced back by 0.5 percent. All three spending categories posted flat readings in July. The saving rate came back down to 5.4 percent in August after climbing to 5.6 percent in July. Now that real household wealth has surpassed its pre-recession peak, we expect to see the saving rate moderate over the next several quarters, which in turn should be supportive of further consumer spending growth.

Easing Inflation Pressures and Stronger Income Growth

Personal income growth strengthened in August while July’s reading was upwardly revised. Nominal personal income is now up 4.3 percent over last year’s levels. Real disposable income bounced back in August, rising 0.3 percent for the month after rising just 0.1 percent in July. Income from wages and salaries continued to edge higher, rising 0.4 percent, indicative of the continued momentum observed from the recent employment reports.

One of the key drivers of the stronger real spending reading outside of income growth has been the more modest pace of inflation. The PCE deflator came in flat in August after soft readings over the past couple of months. Consumer prices are now up just 1.5 percent over last year’s levels. Food prices rose a slight 0.3 percent in August, while energy prices posted a 2.7 percent decline. Core inflation, which excludes food and energy prices and provides a sense of how broad based inflation pressures may be, also remains in check at 1.5 percent on a year-over year basis. The continued soft inflation reading is one of the key factors keeping the Federal Reserve in its cautious stance on the timing behind any normalization of monetary policy. Given the modest inflation readings for the PCE deflator in recent months, we expect that the Fed will be slow to raise rates, deferring to June of next year. Given the strengthening domestic demand environment, it should only be a matter of time before some inflation pressures begin to build again.