Personal Spending Grew Faster than Expected, But Income Growth Lagged

Spending (+.6% MoM) grew twice as fast as personal income (+.3% MoM) in August. Both were expected to increase by +.4% MoM. Total inflation fell less than expected to +1.8% YoY (consensus +1.7%) from +2.1% in July. Core PCE inflation, as expected, also fell to +1.8% YoY, and rose +.1% MoM. Since spending grew faster than incomes, the savings rate fell back to +.7% from +.9% in July, and is down -.1% YoY.

Over the past year, personal income has risen +6.8% YoY and personal spending has risen +5.2% YoY. Disposable income has risen at the slightly slower pace of +6.2% YoY.

Continued strength in consumer spending indicates that the weaker job market and tighter credit markets had not yet negatively impacted a major component of GDP growth in August, though it is expected to slow growth later this year. The +.6% MoM rise in personal spending was the largest increase in four months. Lower gas prices and larger incentives from car dealers appear to have helped fuel the boom. Consumer spending currently accounts for around 70% of the U.S. economy. Adjusted for inflation, spending rose +.6%, the most since October 2006. Inflation-adjusted spending on durable goods jumped +2.8% MoM while non-durable goods purchases held steady. Spending on services rose +.6% MoM.

Income growth slowed to +.3% from +.5% in July. Actual salary growth was only +.2%. Disposable income, or what is left over after taxes, rose +.4% in August, down from a gain of +.6% in July. Most of the gain in wages was in service producing industries. The majority of the income data supports the recent payroll data showing a slowdown in the economy. Non-farm income only rose +.1% last month, and unemployment payments jumped +2.2%. Reflecting higher agricultural (food) prices, farm incomes have risen over 100% YoY.

Core inflation rose +.1% MoM for the sixth month in a row, indicating that excluding food and energy inflation growth has been steady and moderate most of this year. Core inflation, at +1.8% YoY, is at its lowest level since early 2004, and the annualized rate for the past six months has fallen to +1.3%. With both headline and core inflation falling below 2% YoY, the Fed has greater latitude to reduce their inflation concerns.

Interest rates fell slightly following the announcement.