Personal income grew 0.3% month-on-month (m/m) in September, up slightly from July’s 0.2% gain and bang on market expectations.
Accounting for inflation and taxes, real personal disposable income grew a modest 0.1% for a fourth consecutive month.
Consumer spending was robust in September. Personal consumption expenditures grew by 0.5% m/m, above the market expectations for 0.4% growth. This was also a marked acceleration relative to the 0.3% pace in August.
Stripping out inflation, spending rose 0.4% m/m in real terms – an improvement relative to the 0.2% gain recorded in August. A gain in spending volumes was supported by much higher outlays on goods, which rose by 0.7% m/m, while services increased by 0.2% m/m.
The Fed’s preferred inflation metric, the core PCE price deflator, rose 0.3% m/m – ahead of the market expectations for 0.2% increase. Year-over-year, core PCE inflation came in at 2.7%, unchanged for the third consecutive month.
Consumers set aside less for the rainy day. The personal savings rate declined to 4.6% in September (down from 4.8% in August and 4.9% in July).
Key Implications
Today’s monthly income and spending data showed that consumers have ended Q3 on a strong note. Indeed, consumer spending has been remarkably resilient in the last two quarters. As we noted in our recent report, there are several reasons consumers may have more momentum than previously anticipated, such as a notable upgrade to personal income in H1-2024 and a larger cushion of savings.
Looking ahead to the fourth quarter, monthly spending data is expected to be distorted by the impacts of Hurricanes Helene and Milton, with clean-up and rebuilding efforts likely to boost spending in the short term. However, as these effects subside, we expect spending to moderate closer to a 2% pace throughout 2025, as the economy remains on track for a soft landing. With inflationary pressures easing and the labor market gradually softening, we expect the Fed to cut the fed funds rate by 25 basis points next week.
