After a very weak performance in August, Personal Consumption Expenditures surged in September, up 1.0 percent in nominal terms. Income increased 0.4 percent over the month.
Strength Across the Board
Consumers were not shy in September as they pushed every category of Personal Consumption Expenditures (PCE) much higher. PCE increased 1.0 percent during the last month of the quarter, after increasing only 0.1 percent in August and 0.4 percent in July. Every sector of consumption was booming in September. Goods consumption surged $89.4 billion during the month, with durable goods up $46.5 billion and non-durable goods consumption up $42.9 billion. Furthermore, services consumption was also very strong, up $46.6 billion. We have not found a stronger month for all three components of nominal PCE going back to 1980.
Inflation also took a bit out of the strong increase in nominal PCE. The PCE deflator was up 0.4 percent in September, which meant that real PCE increased only 0.6 percent. However, this print was stronger than markets were expecting, and strong enough to bring real PCE up by 2.4 percent annualized during the third quarter of the year. Inflation affected all sectors of consumption. However, the non-durable sector took the full brunt of higher prices as real PCE for non-durable increased only $8.4 billion compared to the $42.9 billion increase in nominal non-durable PCE.
Personal Income Continues to Disappoint
However, personal income continued to disappoint in September. Personal income increased 0.4 percent in nominal terms after increasing 0.2 percent in August and 0.3 percent in July. Meanwhile, disposable personal income increased 0.4 percent in nominal terms after increasing 0.1 percent in August and 0.2 percent in July. However, real disposable personal income was flat in September after declining 0.1 percent in August and increasing 0.1 percent in July. Wages and salaries recovered somewhat from a weak August when they increased only $5.1 billion. In September, wages and salaries increased a more ‘normal’ $37.6 billion.
Americans Continued to Dip Into Savings
This meant that Americans, in lieu of higher incomes to support stronger consumption, have continued to dip into savings. Savings declined a whopping $79.5 billion during the last month of the quarter to take the savings rate from 3.6 percent during the first two months of the quarter to only 3.1 percent in September.
This improvement in consumption is a reflection of the strong consumer confidence numbers since the presidential election in November of last year. However, this behavior is not sustainable in the medium to long term. In order for consumption to continue to improve and remain the driving force of the U.S. economy, Americans will need to get higher incomes through, perhaps, higher wages and salaries, or a combination of higher borrowing and higher wages and salaries.
