INDICATOR: August Consumer Spending and Income and September Consumer Confidence
KEY DATA: Consumption: +0.3%; Disposable Income: +0.3%; Inflation: +0.1%; Ex-Food and Energy: 0%/ Consumer Sentiment: +3.9 points
IN A NUTSHELL: “Consumers are exuberant and that is translating into some pretty good spending.”
WHAT IT MEANS: Third quarter growth is becoming clearer as more data come in and it will be good, just not great. Household spending was solid in August, led by a surge in services. This was expected as utilities are in the services category and it was a brutally hot month in many parts of the country. Don’t expect that to be repeated in September. Vehicle sales were soft and that led to a decline in durable goods spending. Nondurables were up, which says people are buying lots of different things. So far this quarter, consumption is growing at a better than 3% pace, which means overall economic growth should be at least that high. As for income, there was a decent but not robust rise in wages and salaries. There seems to finally be a bit of an upward trend in this category, but not yet a strong one. On the inflation front, there really isn’t a lot. The rate is above 2% for all measures, but it is not accelerating. That is good news and it supports the Fed view that it looks like we are not headed to an upside shock on inflation.
Consumers are in a great mood. The University of Michigan’s Index of Consumer Sentiment rose solidly in September and it the level was above 100 for only the third time since mid-2004. Views on current conditions jumped while expectations rose more moderately. Interestingly, upper income households are becoming more cautious while low-income respondents indicated that they are more positive about the conditions.
MARKETS AND FED POLICY IMPLICATIONS: Today’s economic numbers were very solid. How much of the consumer spending was due to utilities is unclear, but don’t expect service demand to be nearly as high in September. Since services comprise about two-thirds consumer demand, that implies we could see a more modest number. We still need to see faster income growth to support the very solid spending we saw in the spring and likely during the summer. I am not sure if that will emerge and if not, we could be looking at a softer fourth quarter number. But investors are not likely to worry until they see softer numbers. The economy is evolving in a manner that is consistent with the Fed’s slow but steady rate hike/balance sheet reduction strategy. It will likely continue on that path over the next year.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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