Consumers Hunker Down

Personal income unexpectedly jumped 0.5 percent in August, following a 0.6 percent drop in July. Wage income rose 0.4 percent, the strongest growth since March. Additional unemployment insurance benefits and slightly larger stimulus-related transfer payments also helped lift income growth.
Despite strong income growth, spending was weak. Personal consumption expenditures were unchanged after edging up 0.1 percent in July. Durable goods spending increased 1.4 percent as vehicle sales rebounded during the month. Spending on services edged up 0.1 percent while spending on nondurable goods fell 0.6 percent.

Adjusted for inflation, real consumer spending was also unchanged after declining 0.5 percent in July and 0.3 percent in June. It appears real consumer spending is on track to decline at an annual rate of about 2.0 percent in the third quarter. The last time real consumer spending posted a quarterly declined was in the 1990-91 recession.

Overall inflation, as measured by the price index tied to PCE, remained unchanged in August. Over the past year, the overall PCE rose 4.5 percent, its fastest pace since the early 1990s. The index excluding food and energy (or the core PCE)—the Fed’s preferred measure of inflation—rose by 0.2 percent. Over the past year, the core PCE rose 2.6 percent, the largest increase since October 1994. The year-over-year increase in the core PCE has been outside the Fed’s comfort zone of 1.0 to 2.0 percent since August 2007.

Because consumer spending accounts for about 70 percent of gross domestic product, the declines in real consumer spending in July and August suggested that economic growth in the third quarter is poised to slow to an anemic pace from the 2.8 percent pace of the second quarter.