Personal Income Growing Faster Than Spending Pushing Savings Rate Higher

Personal spending growth slowed below income growth in September. Personal spending rose +.3% MoM (consensus +.4%), with August's growth revised down to +.5% from the previously reported +.6% gain. Personal income has been growing at a faster pace, rising +.4% MoM (at consensus) in September, with August's level improved to +.4% from the originally reported +.3% MoM increase. Since spending grew more slowly than incomes, the savings rate improved to +.9% from +.8% in August.

The slowdown in spending is likely tied to consumer hesitation (or inability) to take on more debt as the housing market stumbles and credit conditions tighten. Over the past few years, each new dollar of GDP growth has been accompanied by an even fast rise in debt growth, as consumers have used the rising values of their homes as an easy way to borrow and access more funds for spending. This cycle is likely to begin breaking down as home prices depreciate. The consumer has been the engine of growth so far this decade, and accounts for over 2/3rds of GDP spending. So, a slow down in consumer consumption will be watched very closely. A survey released this morning indicates 41% of consumers expect to reduce holiday expenditures this year. This is the largest decline in 7 years.

PCE inflation figures came in as expected in September. Headline inflation rose from 1.8% YoY to 2.4% YoY in September as higher commodity prices, especially for oil feed through. Core PCE, which excludes food and energy costs, which are considered to be more volatile from month to month, rose +.2% MoM and held steady at +1.8% YoY. Annual changes in core PCE, at +1.8%, remain at the lowest level since Feb 2004, and within the Fed's perceived comfort band of 1-2% annual growth.

When adjusted for inflation, spending rose +.1% MoM in September, the smallest increase since June. This compares to a rise of +.6% MoM in August. Disposable income (income after taxes) increased +.4% MoM in September.

Over the past year, personal income has risen +6.8%, disposable income has risen +6.3%, and personal spending has risen +3.2%.

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Initial jobless claims were 327k last week, remaining near the elevated 330k level of the past few weeks. Continuing claims rose almost 60k, much more than expected. Consensus is for a gain of 81k jobs for Friday's change in non-farm payrolls.