September Personal Income & Spending Report Signals Worsening in Q4

Economists say the personal income and spending report from the U.S. Commerce Department supports the view that fourth-quarter growth will be worse than the Q3 results published on Thursday. Personal spending, which comprises more than 70% of GDP, fell 0.3% in September, following two months of flat growth.

T.J. Marta, fixed income strategist at RBC Capital Markets, noted that personal income rose 0.2% as expected, but personal spending was worse than consensus. "This print is the worst since 2005 and the sixth worst since 1991. Worse, while the data is subject to anomalies in particular months, the six-month moving average, +0.2%, is tied for the fifth worst print since 1961."

The Federal Reserve's preferred measure of inflation, the personal consumption & expenditure (PCE) core deflator, advanced by 0.2% (0.176%) in September, a faster pace than the 0.1% expectation, and contributing to a year-over-year change of 2.4% (2.402%).

Core inflation is still four-tenths above the Fed's unofficial comfort zone, but economists, as well as the Fed, assume that prices will moderate as the economy slows down.

Eric Lascelles, senior rates and economics strategist at TD Securities, said the measure came in slightly stronger than expected, suggesting that "inflation has not completely fallen out of bed yet." He said the report indicates that deflation isn't quite a concern, but that it's clear all signs point towards slower and slower inflation.

He also said the spending component is more relevant to the report, as it showed the first outright negative seen in years. That wasn't unexpected, but it's still a "stunning development", he added.

Looking ahead, HFE chief U.S. economist Ian Shepherdson said: "Expect further declines in spending, but not as fast as Q3; the plunge in gas prices releases cash and will limit the spending hit."

The implications of the report were mostly negative, but U.S. economist Paul Ashworth from Capital Economics noted that the savings rate ticked up half a percentage point to 1.3% from 0.8%, which may start a trend going forward.

"The decline in consumption coupled with a 0.2% m/m gain in personal income was enough to raise the saving rate to 1.3%, from 0.8%," he said. "Over the next couple of years, we expect that rate to climb to 6% or so as consumers finally capitulate and start the long process of consolidating their financial positions."

By Patrick McGee and edited by Nancy Girgis
©CEP News Ltd. 2008