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Consumer Spending and Income Rise, Fed Keeps Hike in Play

Posted by Joseph Trevisani on Sep 28, 2015 11:27:00 AM

American household income and spending remained steady in August giving a preliminary indication that the month's equity collapse against a background of global economic turmoil has not derailed the U.S. consumer.

Domestic consumption rose 0.4 percent, the same as in July and was slightly better than the 0.3 percent median prediction. Personal income climbed 0.3 percent, lower than July's 0.5 percent gain, which was revised from the initial 0.4 percent release and missing the 0.4 percent forecast. 

Consumers, whose activities account for about 70 percent of U.S. GDP, are offsetting the drag from sliding international markets, weakening overseas consumption and a strong dollar, that have affected American exports.

Steady gains in the labor market over the last two years, aided by cheap gasoline and modestly growing incomes, may give consumers the confidence to ride out the equity and international storm without limiting consumption. 

The Federal Reserve is still considering a likely rate hike this year, said New York Federal Reserve President William Dudley and inflation could reach the bank's 2 percent target faster than expected.  

Dudley who made these remarks at an event sponsored by the Wall Street Journal, said the first increase could come in October, as the governors incorporate the improving U.S. economic situation into their view.  

The Fed declined to increase rates at its September 17 meeting, despite market expectations, citing global economic concerns and the lack of inflation.  Mr. Dudley said he believes the weak global economy and strong U.S. dollar to be transitory.

The dramatic fall in U.S equity average began on August 19th. The Dow is trading (1:37 pm, New York) 9.1 percent below its August open. Any effect on spending and income will probably be part of  September  economic figures which begin with this Friday's Employment Situation Report from the from the Labor Department, including non-farm payrolls, average hours earning, and the unemployment and labor force participation rates.  

Current forecasts from Bloomberg are for a slight gain in payrolls to 202,000 from August’s disappointing 173,000, a 0.1 percent drop in average hourly earnings to 0.2 percent and stable unemployment and participations rates. September retail sales are slated for release October 14th, followed by industrial production on the 16th, housing starts on the 20th and durable goods orders on the 27th. 

Inflation has been below the Fed's 2 percent retarget of more than two years and one half years. The personal consumption expenditure deflator for August, the central bank’s chosen price measure was flat in August as expected, down from July’s 0.1 percent rate.  

The annual price increase were just 0.3 percent as in July as forecast.  The core rates, excluding food and energy costs rose 0.1 percent on the month as expected and the annual rate gained 0.1 percent to 1.3 percent.  This rate has been below target since May 2012. 

Personal income for the year was 4.2 percent higher, just below the 4.5 percent average for the past 18 months. Personal spending was 3.5 percent higher in August on the year, also less than the 4.0 percent average for the past year and a half. 

Real personal spending, that is consumption adjusted for inflation, increased 0.4 percent in August, ahead of the 0.3 percent estimate. July's result was revised up to 0.3 percent from0.2 percent. The annual increase slipped to 3.2 percent in August from 3.4 percent prior.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

personal income sept 28

personal spending sept 28

 real spending

 

pce core prices yoy sept 28

 

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