Saturday, October 28, 2023

Great spending numbers exceeding decent income figures. So which wins out?

This wasn't surprising after Thursday's blowout GDP Report, but Americans finished out Q3 with strong spending numbers.
U.S. consumer spending surged in September as households boosted purchases of motor vehicles and traveled, keeping spending on a higher growth path heading into the fourth quarter....

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated 0.7% last month after an unrevised 0.4% rise in August, the Commerce Department's Bureau of Economic Analysis reported. Economists polled by Reuters had forecast spending gaining 0.5%.

The increase in spending was spread across goods and services. Outlays on goods increased 0.7%, led by prescription medication, new light trucks, food and beverages as well as recreational goods and vehicles. Spending on services shot up 0.8%, boosted by international travel, housing and utilities, healthcare and airline transportation services.

The data was included in the advance gross domestic product report for the third quarter published on Thursday, which showed consumer spending accelerating sharply, contributing to the fastest pace of economic growth in nearly two years.

Adjusting for inflation, consumer spending rose a solid 0.4% in September after ticking up 0.1% in August, a strong hand-off from the April-June quarter that bodes well for consumption and overall economic growth in the fourth quarter.
Inflation-adjusted consumer spending has increase by more than $375 billion in 2023, and continues the mostly steady growth that this country has had since most Americans were able to get COVID vaccinations in early 2021.

On the income side of the report, total income went up by nearly $78 billion (annual rate), and disposable income was up by more than $56 billion. But that wasn't nearly as much as the increase in spending, which was nearly $139 billion. And that meant the US savings rate dropped to a measly 3.4%, back to the inflation-influenced low levels of 2022.

On a related note, inflation-adjusted disposable income fell in September. This was the 4th straight month real disposable income has gone down in the US, and while we're still well above the inflation-peak depths of June 2022, it's no different than what we had in May 2021.

Which means we enter Q4 in an odd spot. Consumers are clearly better off than they were a year ago, and are freely spending and lifting the economy. The jobs market is staying strong, although income growth has leveled off, which helps the inflation outlook, but keeps pocketbooks from getting fat. The question now is if the strong output figures lead to higher incomes, or if the lack of incomes cause spending and economic growth to level off.

The first bits of October data start to roll in next week, and it does feel that the next few weeks tell us a lot about where this economy is heading for the election year of 2024.

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