Nominal personal income came in at 0.2%, matching the expected rate, and is now 3.1% higher than a year ago. Meanwhile, real personal disposable income increased by 0.1% in the month, following a solid 0.3% rise in July; it was up 2.4% annually. Consumer spending was unchanged, following 04% and 0.5% readings in nominal dollars in July and June, respectively; this was less than the 0.1% forecast increase. Real personal spending was 0.1% lower. Spending in the month (in real terms) was driven by decreases in durable goods expenditure (1.3%, largely autos), spending on nondurables fell by 0.3%, following a 0.2% decline; and spending on services rose by 0.1%. The report incorporates annual revision for the last three years.
Private sector wages and salaries (roughly 45% of personal income) were up only 0.1% in the month (current dollars), following a 0.5% increase in July. Meanwhile, government sector wages and salaries were 0.3% higher; they are now 2.8% higher annually. This annual rate of change is improving, but still far below the historical median rate of 6.4% (1960-2014). Private sector wages and salaries increased 3.9% over the last year (historical median was also 1960-2016 = 6.4%). Lastly, the PCE price index and the core price index were up by 0.1% and 0.2%, respectively. The annual change for the core rate was 1.7% and 1.0% for the headline rate (still well below the Fed’s target).
The tightening in the labour market is still only tentatively starting to be reflected in a number of measures we track with regard to wage inflation (e.g., the Atlanta Fed’s wage tracker index and average hourly earnings), although evidence from perhaps the best measure of compensation costs pressures—the employment cost index—still shows compensation gains to be relatively subdued (2.3% annually). The reality is that consumer spending has been the key driver of economic growth, as yesterday’s revised GDP report again demonstrated (real final sales were up by 2.6%!), yet consumers are also not taking out much in the way of debt (growth of 3% relative to the historical average rate of 7.2%). This is largely because their fingers were burnt during the last crisis and banks now exhibit tighter lending standards. However, it is also the case that both millennials and baby boomers (which account for more than 50% of the current population) are less keen on leveraging themselves up, mainly because they are either downsizing from larger homes and/or renting, whilst following an asset light model—similar to many companies (they don’t want ‘stuff’ as much as services and experiences). As a result, with slower growth in debt, seemingly less demand is being pulled forward, and less consumption smoothing is taking place. This, in turn, means that consumer spending is likely to be that much choppier (as seems to currently be the case with respect to the behaviour of retail sales). As far as the Fed is concerned, it will find this report a little disappointing (August was quite soggy for economic growth across the board), and it is not suggesting the Fed is behind the curve to the point where rates need to rise immediately.
For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.
Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.