Nominal personal income came in at 0.6%, which was higher than the expected rate (0.4%) and is now 3.9% higher than a year ago. Real personal disposable income also experienced a strong increase, rising 0.4%, or 2.7% annually. Consumer spending was somewhat softer, rising 0.3%, following 0.7% and 0.0% readings in nominal dollars in September and August, respectively; this was less than the 0.3% forecast increase. Real personal spending was 0.1% higher. Spending in the month (in real terms) was driven by increases in durable goods expenditure (1.0%, largely autos) and spending on nondurables (0.8%); spending on services fell by 0.3%.
Private sector wages and salaries (roughly 45% of personal income) were up 0.6% in the month (current dollars), following a 0.5% reading in September. Meanwhile, government sector wages and salaries were 0.3% higher; they are now 3.1% 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 4.5% 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 0.2% and 0.1%, respectively. The annual change for the core rate was 1.7% and 1.4% for the headline rate (still well below the Fed’s target).
The U.S. consumer continues to be in relatively good shape and remains a bright spot for the U.S. economy. In the last quarter, consumer spending rose by 2.8%, and contributed 1.9 percentage points to the 3.2% increase in aggregate GDP. Hence, despite a fairly weak July and August, spending in September seems to have recovered quite strongly. October’s spending data unveiled today, suggests that the fourth quarter got off to an okay start. Momentum looks like it will improve in November judging by the most recent consumer confidence data for the month, which was particularly strong (highest since 2007). More generally, however, consumers are finding themselves paying much more for healthcare services (where inflation is rising at a very rapid rate), which is taking a toll financially and perhaps also psychologically. They are also taking out far less debt than has been the case in post-war history. 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, is likely to be at least one reason consumer spending has been that much choppier in the last few years. While it is too early to really know what consumer spending will look like under a Trump administration, consumers are heading into 2017 in relatively good shape. As far as the Fed is concerned, it will again be quite happy with this report and help to reinforce its likely decision to raise interest rates at its December meeting.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.