No tricks, just some consumer and inflation treats
- Consumer spending ended Q3 on a strong note as real consumer spending grew a robust 0.4% month over month (m/m) in September. Disposable income adjusted for inflation rose a less impressive 0.1% for a fourth straight month as an increase in compensation was offset by falling personal interest and proprietors’ income.
- Solid consumer spending momentum is backed by robust income growth. Both real disposable income and real consumer spending growth grew 3.1% year over year (y/y) last month. Looking ahead, though, slower monthly income momentum should lead to more cautious consumer spending with real consumer spending growing 2.3% annualized in Q4, after a 3.7% advance in Q3.
- The personal savings rate fell 0.2 percentage point (ppt) to a nine-month low of 4.6% in September as consumers partially relied on their savings to power their spending. Still, recent upward annual revisions to the data have left the savings rate well above its post-pandemic trough of 2.0% reached in June 2022 — a sign that consumers haven’t been spending well over their means in recent years.
- On average, household finances remain healthy even if increased polarization is evident. Lower-income and younger families are gradually more constrained by elevated debt financing costs and rising delinquencies while older generations and higher-income households have more fixed-rate debt and therefore less burdened by elevated debt servicing costs. We project consumer spending growth will gently ease into a slightly below-trend pace in H1 2025 as slower employment growth weighs on income trends and prices and rates remain generally elevated. Overall, we see consumer spending averaging 2.6% in 2024, before slowing to 2.2% in 2025.
- On the inflation front, the headline personal consumption expenditures (PCE) deflator rose 0.2% m/m while the core PCE deflator climbed 0.3% m/m in September, in line with expectations. As a result, headline PCE inflation ticked down to 2.1% y/y — its lowest since February 2021 and essentially in line with the Fed’s 2% target — while core inflation remained steady at 2.7% y/y. We anticipate the Fed’s favored inflation gauge, the deflator for PCE, will rebound toward 2.4% y/y by year-end due to unfavorable base effects. Meanwhile, core PCE inflation is likely to end the year around 2.7% y/y.
- With economic growth likely to moderate and disinflation factors still at work, we expect inflation to remain on a gentle descent toward the 2% target into 2025. We continue to expect the Fed to ease policy by 25 basis points (bps) at every meeting through June next year amid resilient but moderating growth and cooling labor market trends. This would translate into 50bps of rate cuts by year-end, putting the federal funds rate at 4.4% in December, and another 100bps of cuts to 3.4% in June 2025.
In the details
Real personal outlays rose 0.4% m/m in September, following an upwardly revised 0.2% increase in August.
- Real spending on nondurable goods led the charge in September with a 0.8% jump in outlays reflecting broad-based strength across categories. The gain was led by stronger spending on food (+0.6%) and gasoline (+0.3%) while clothing (+0.1%) saw a more muted gain.
- Real durable goods outlays rebounded 0.4% in August on the back of stronger motor vehicle (+1.4%) spending, which was only partially offset by weaker outlays on furnishings and household equipment (-0.3%).
- In contrast, services outlays posted a more moderate 0.2% gain in September following a 0.3% increase in August. A few of the categories that underpinned the strength in August posted weaker gains, including transportation (-0.7%) and recreational services (-0.4%). These were offset by solid spending at restaurants and hotels (+0.8%) and moderate outlays on housing (+0.2%), health care (+0.2%), and financial and insurance services (+0.2%).
Personal income rose 0.3% in September as a robust 0.5% advance in wages and salaries and a 0.5% gain in rental income were offset by a 0.4% decline in proprietors’ income and a 0.2% drop in income receipts on assets. Disposable income adjusted for inflation rose 0.1% for a fourth straight month, but momentum remains encouraging as it was still up a solid 3.1% y/y.
On the inflation front, the three-month annualized headline inflation reading rose 0.2ppt to 1.8% while the six-month annualized reading fell by 0.3ppt to 1.7%. The three-month annualized core inflation reading rose 0.2ppt to 2.4%, and the six-month annualized reading fell 0.2ppt to 2.3%.
Inflation data remained encouraging in September even though monthly price increases picked up slightly across goods and services categories:
- Durable goods prices rose 0.3% m/m after falling for two consecutive months, with the gain driven by higher prices for cars (+0.3%) and furnishings and household equipment (+0.5%).
- Nondurable goods prices fell 0.4% led by plunging gas prices (-4%) while clothing prices (+0.7%) and food prices (0.4%) picked up.
- Services prices rose 0.3% following a 0.2% increase in August amid stronger prices for transportation (+1.2%) and as housing (+0.4%) and health care (+0.4%) costs picked up modestly. Recreation services (+0.2%) prices saw a more muted gain, and prices for food services and accommodations were flat on the month.
