Inflation-adjusted spending by consumers was flat in September, according to Commerce Department data released on Friday, a dynamic that also seen in the most recent consumption data over the Thanksgiving weekend.
Based on this and recent private sector data, one cannot avoid the fact that the condition of U.S. households down market is sour at best and weak at worst.
Unlike consumers in the upper spur of the K-shaped economy, lower-income households are at best treading water these days.
While nominal income, compensation, wages and salaries all increased by 0.4%, personal spending increased by 0.3% and the savings rate remained steady at 4.7%, according to the report, which was delayed by the government shutdown.
But more important, disposable income increased by 0.1% on an inflation-adjusted basis and personal income excluding government transfers advanced at a 0.1% rate.
With real wages stagnating and inflation-adjusted dynamics looking soft, these reports feed into the likelihood of an exceptionally soft gross domestic product in the fourth quarter given the 1.25% net drag on growth caused by the shutdown.
Both the core and top-line personal consumption expenditures index, the Federal Reserve’s preferred inflation gauge, advanced at 2.8% annualized pace, according to the Commerce Department. On a three-month annual basis, the core increased at a 2.9% pace and the top-line figure rose at a 2.8% rate.
This data is not what one would call rate cut friendly for the Fed. The central bank, after all, has not achieved its 2% inflation target over the past five years, and Fed officials will most likely indicate in the Summary of Economic Projections when they meet next week that they do not expect inflation to move back to target until 2028.
Yet investors are currently pricing in a 95.2% probability of a 25 basis-point rate cut at the meeting on Dec. 9 and 10.
Get Joe Brusuelas’s Market Minute economic commentary every morning. Subscribe now.
Inside Friday’s data, goods inflation increased by 1.4% and durables rose by 0.9%. This is important to understand because as recently as April, which was the kickoff of the most recent trade war, both goods and durables were experiencing outright declines in prices. This is the price of the current trade war.
Non-durables pricing increased by 1.7% from a year ago and service sector inflation increased by 3.4% annually. Food inflation rose by 2.4% and energy pricing advanced at a 2.7% pace over the past year.
We have made the case for some time that robust demand for services is partially a function of income and spending among the upper two quintiles of U.S. households. In the end, service sector inflation is simply not abating at a sufficient pace and instead is offsetting price declines elsewhere.
