- INDICATOR: September Household Spending and Income
- KEY DATA: Consumption: +0.5%; Disposable Income: +0.3%; Prices: +0.2%; Excluding Food and Energy: +0.1%
- IN A NUTSHELL: “Incomes are rising and people are spending that money.”
WHAT IT MEANS: On Friday, we saw that the economy grew at a solid pace during the summer, though consumption increased more moderately. Today, we got the details on how spending was distributed over the third quarter. It was a roller coaster ride, driven in no small part by vehicle sales. July was a pretty good month as people bought lots of goods and services. A solid rise in vehicle demand did help things out. But in August, despite continued spending on services, a cut back in vehicle sales led to consumption actually dipping. Well, that decline was reversed quickly enough as vehicle and services spending popped again in September. Why am I spending so much time on that pattern? Simple, the Fed claims it watches incoming data. Well, the incoming data can be volatile, so watching any month’s numbers is a dangerous thing to do. What we learned from the September report is that household are buying goods and services, except maybe some soft-goods, at a moderate pace.
What happens to consumption going forward depends largely upon income growth and to some extent confidence. Consumer confidence has been bouncing around, but generally trending upward. Still, the election is creating a ton of angst. So the burden for better household spending falls on income gains, which right now are basically just okay. Disposable personal income, which is what we have left after taxes, rose moderately in September and for the third quarter as a whole. Importantly, wage and salary gains are beginning to improve. Still, when inflation is added into the mix, the rise has not been anything special.
As for inflation, it still isn’t a major threat. Since September 2015, overall consumer costs were up just 1.2%. When food and energy were excluded, the rise jumped to 1.7%, not that far from the Fed’s 2% target. Importantly, the negative impact of the collapse in energy costs is starting to dissipate and that should lead to faster yearly rises in the overall inflation measure going forward.
MARKETS AND FED POLICY IMPLICATIONS: The Fed meeting starts tomorrow and ends on Wednesday and today’s report really doesn’t tell the members anything new. They continue to face an economy that is growing at 2% or so with inflation slowly rising toward their target. There is no compelling reason to increase rates. Given the tightness in the labor market and slow rise in inflation, there is also no great argument to be made that a rate hike would be problematic. But if the Fed was even thinking of doing anything before the election, the FBI Director’s action shows just how perilous it would be to raise rates right now, especially since it is totally unclear which candidate, if either, would be helped or hurt by a rate hike. It will be interesting to read the statement. I had been expecting it to signal clearly that the economy was strong enough (if not strong) and with inflation moving in the right direction, if conditions kept improving, a rate hike before the end of the year would be warranted. But even that largely nondescript comment would probably be attacked by the political spin-meisters, so who knows what the statement will look like.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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