Broad economic data released Wednesday indicate that the U.S. expansion is accelerating while the Federal Reserve’s preferred underlying inflation measure remains at or above 3%, supporting a 25 basis-point rate increase by year-end.
Household spending strengthened in September, and revised second-quarter gross domestic product shows the economy entered midyear on firmer footing than initially estimated.
Demand from households and AI-focused technology investment remains strong despite discontent among middle- and lower-income households over rising prices.
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Personal income, spending and inflation
August personal spending rose by 0.9%, or 0.6% after inflation, while income increased by only 0.2%. Inflation-adjusted income has been flat or negative since March, helping explain falling consumer confidence even as household spending remains strong.
Compensation, wages and salaries, and disposable income each rose by 0.3% in August. The savings rate fell from 4.6% in July to 4.1%, reflecting spending growth that outpaced income.
Inflation-adjusted personal income excluding government transfers fell by 0.1%, contributing to discontent among middle- and lower-income households facing higher gasoline and grocery prices. Real disposable income was flat.
Headline inflation rose by 0.3% and core inflation by 0.2%, leaving year-over-year rates at 3.4% and 3%, respectively. Methodological changes modestly lowered the PCE deflator estimates; without them, the rates would have been 3.6% and 3.1%.
Year over year, goods prices rose by 3.6%, including 2.6% for durables and 4.1% for nondurables; services rose by 3.4%, food by 1.9%, and energy by 16.8%.
GDP revised higher
Second-quarter GDP was revised from 1.5% to 2.2%, confirming that trade and inventory swings had obscured stronger consumption and investment. The revision points to momentum into the current quarter, when growth is likely to exceed 3%.
The third estimate raised household consumption growth from 3.4% to 3.8%, gross private investment from 2.7% to 4.6%, and final sales to private domestic purchasers from 4.2% to 4.6%.
Alternative measures also show stronger growth: Gross domestic income rose by 2.6%; the GDP/GDI average, 2.4%; real final sales, 2.8%; gross domestic purchases, 3.3%; and final sales to domestic purchasers, 3.8%.
August trade balance
The August U.S. trade deficit widened from $115 billion to $132.6 billion, creating a drag on current-quarter growth even as the Atlanta Fed tracker showed a 5% pace. The increase reflected imports of industrial supplies, capital goods and consumer goods.
The takeaway
Underlying inflation remains near 3%, above the Fed’s 2% target, while strong household spending and AI infrastructure investment signal an economy running hot.
Growth is stronger than widely recognized, though gains remain uneven. With energy costs and demand likely to keep inflation elevated, we expect the Fed to raise rates at least once, in December.
