Incomes and Spending Slowing, as Savings Rate Rises and Inflation Eases

Personal income and spending growth are both decelerating, as expected. Income growth in September slowed to +0.2% MoM (consensus +0.1%, prior revised down to +0.4% from +0.5%). Personal spending contracted, shrinking by -0.3% MoM (consensus -0.2%, prior unch), the largest monthly drop in four years. This data confirms that the third quarter of this year had the weakest quarter of consumer consumption in decades. Inflation indicators eased less than expected, while the savings rate rose to +1.3%. The increase in the savings rate this month showed real determination on the part of savers, as there were no extra rebate checks to easily fund this growth.

Compensation rose +0.1% MoM, the smallest monthly rise since April. Disposable income improved, growing +0.2% MoM, the first increase in four months.

Purchases of durable and non-durable goods both dropped in September. Only demand for services, which accounts for almost 60% of spending, rose slightly. When adjusted for inflation, spending dropped an even larger -0.4% MoM, pulled down by an inflation-adjusted drop in durable goods spending of -2.9% MoM. Yesterday it was reported that spending on non-durable goods such as food and clothing fell by the most since 1950 in the third quarter of this year, with demand for durable goods falling the most in over 20 years. The steady deceleration in spending is a concern for the economy, which is heavily dependent on consumer spending. Weakening job prospects, declining net worth due to falling asset values, and tighter credit, suggest that the trend is likely to persist as the economy continues to weaken. This is an important contributor toward economists lowering growth prospects for the fourth quarter of this year and the first quarter of next year.

The PCE (personal consumption expenditures) deflator fell to 4.2% from 4.5% the prior two months. This indicator is viewed as the Fed's preferred measure of inflation for US consumers. The market had looked for a slightly larger decline to 4.1%. Core inflation rose +0.2% MoM in September, the same pace as August. Improvement was seen in the annual change in core PCE, which excludes more volatile food and energy prices, which eased down to +2.4% from the originally reported growth rate of +2.6% YoY in August, which was subsequently revised down to +2.5% YoY.

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Third quarter employment costs rose +0.7%, as expected, and the same pace as the first and second quarters. The annual increase, at +2.9% YoY, was the smallest rise since the first quarter of 2006. The second quarter's annual pace was +3.1%. Wages and salaries grew fast (+3.1% YoY) than benefits (+2.6% YoY) over the past year.