Consumers Drain Savings Further

The Personal Income and Outlays data release shows that inflationary pressures further eroded household incomes and spending in September. The Personal Consumption Expenditures Price Index (PCEPI) rose by 0.3% from August to September, holding the year-over-year rate steady at 6.2%. Core inflation grew at a strong pace with the index rising by 0.5% in the month. The 12-month pace of core inflation came in at 5.1%, an increase from the August rate of 4.9%. All of these increases were close to consensus and are a sign that inflationary pressures have so far powered through rate increases.

Inflation-adjusted disposable income essentially flatlined in September, a sign that inflationary pressures continue to eat away at household finances. Spending held up somewhat better than expected, with an inflation-adjusted gain of 0.3%. Spending on services and nondurable goods both outpaced inflation; the strong dollar boosted international travel and tourism, while falling energy prices helped to buoy spending on oil and energy products. Energy prices have increased in recent weeks and could become a headwind to consumption in the fourth quarter.

Spending grew faster than income, which pushed the saving rate down to 3.1%, the lowest level since the eve of the Global Financial Crisis. The continued decline in the saving rate and slowing of real disposable income growth suggest that household spending could slow again in the fourth quarter. 

The September income and outlays report appeared at the same time as the quarterly release of the Employment Cost Index (ECI), an important measure of compensation and wage pressures. Overall compensation, which includes salaries, incentive compensation and benefits, grew by 1.2% from the second to third quarters. The index has now topped a 1% quarterly growth rate in every quarter since the third quarter of 2021. Overall compensation has not consistently grown above 1% since the early 2000s.

The ECI for wages and salaries that strips out benefits and incentive pay, an important measure of underlying wage pressures, grew by 1.3% in the quarter. The gains were equally strong in both the goods producing and service sectors. While wage pressures remain high, there are some signs that they may be cooling. The issue is that this will not likely be enough to derail inflation. Today’s data affirm the likelihood of the Fed’s hiking rates another ¾ percentage point next week.

Bottom Line

While economic activity rebounded in the third quarter, most of the acceleration was due to a narrowing in the trade balance. Sluggish inflation-adjusted disposable income growth and another drop in the saving rate suggest that consumer spending could ease further in the fourth quarter. Those shifts with additional rate hikes are expected to push the economy into recession by the turn of the year.