Personal income grew 0.4% month-on-month (m/m) in August, in line with market expectations. This was a sizeable acceleration from the prior month’s 0.2% gain. The increase primarily reflected a rise in compensation to employees, receipts on assets, rental income, and proprietors’ income that was partly offset by a decrease in personal current transfers.
Accounting for inflation and taxes, real personal disposable income fell -0.2% m/m, following a similar decline in the previous month.
Personal consumption expenditures rose 0.4% m/m, decelerating from the upwardly revised 0.9% posted in July (previously 0.8%). August’s reading came in just below market expectations for 0.5% growth.
- Expenditures on services grew 0.4% m/m, down from the upwardly revised 1.0% in July (previously 0.8%). Spending on housing and utilities (led by housing), transportation services, and health care were the primary contributors to movements in the services category.
- There was also an increase in goods spending, which rose 0.6% m/m, an acceleration from the 0.5% posted in July. This reflected a 1.3% m/m gain in non-durable goods spending (largely reflecting increased spending for gasoline and other energy goods due to higher prices) as durable goods spending declined by -0.6% on the month.
Adjusting for inflation, real spending grew 0.1% for the month, coming in just above the consensus estimate for a flat reading. In real terms, goods spending was down -0.2% m/m, while services were up 0.2%.
The personal consumption expenditure (PCE) price deflator rose 0.4% m/m, and 3.5% on a year-on-year (y/y) basis – bang-on the consensus forecast (3.5% y/y) but above July’s reading (3.4% y/y).
The core PCE price deflator (which excludes food and energy and is the Fed’s preferred measure of inflation) rose 0.1% m/m, decelerating from 0.2% over the two previous months and was below the consensus forecast of 0.2%. On an annual basis, core PCE inflation decelerated to 3.9% y/y from 4.3% y/y the month prior, falling below 4% for the first time since June 2021.
The personal savings rate fell to 3.9% in August, down 0.2%-pts from July’s reading of 4.1%.
Key Implications
The steam that has kept U.S. consumers powering along is starting to show signs of cooling. Facing a confluence of factors ranging from declining savings to resumption of student loan payments, consumers are coming under increasing strain and this was reflected in subdued spending in August. A downgrade to consumer spending growth in Q2 from the previously reported 1.7% annualized to a more muted 0.8% adds impetus to the cooling momentum. With two data points in for the third quarter, consumer spending growth is currently tracking at around 3.5%, down from our most recent forecast of 3.7%.
The other major point of interest on the radar in today’s report is the core PCE price deflator. While the Fed opted to maintain the policy rate at 5.5% at the September meeting, clear evidence that the recent inflation slowdown can be sustained was a prerequisite to keeping them on the sidelines at upcoming meetings. Today’s PCE inflation numbers delivered on that front. Our measure of non-housing service inflation (aka “supercore”) ticked down to 4.3% y/y from 4.6% in July and remained unchanged at 3.5% on a 3-month annualized basis. With the Fed’s preferred measure of inflation continuing to edge lower in August to sub-4%, market pricing is now heavily favoring the Fed holding rates steady in November.
