Despite the highest inflation in more than 30 years, consumer spending is plodding forward, says analysts at Wells Fargo. They point out that after adjusting for inflation, the 0.8% increase in personal spending was cut in half to a 0.4% real increase. They add third-quarter consumer spending is on track for only a scant gain.

Key Quotes: 

“After the second quarter, in which euphoric consumers flushed with cash fueled economic growth, the summer months saw spending stall. This was mostly due to the Delta variant and rising case counts, but also a confluence of other factors from domestic ones like wildfires in the west to flooding in the east, to global ones like the ugly wind down to the war in Afghanistan and multiple instances of migrant surges at the southern border.”

“The rise in prices obviously makes gains tougher for the inflation-adjusted consumer spending figures. Inflation cut the personal spending estimate in half with real personal spending up 0.4% in August. We look for third quarter PCE to come in at just 0.9% before picking up somewhat in the fourth quarter of the year.”

“Our expectation is that consumer spending will limp across the finish line at the end of this year, a view that is generally supported by our high frequency consumer dashboard. Still, there are some flickers of green in there too. If COVID cases keep falling and sentiment turns positive, there is scope for a more solid finish to this tumultuous year.”

“Real disposable personal income fell 0.3% in August, a sign that inflation is already eating into household purchasing power. One comfort is that households are still saving more. Personal savings remain well ahead of pre-pandemic norms, with the saving rate at 9.4%, a full two percentage points above the prior cycle average.”

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