Personal spending grew in September for the second straight month as the extra income from the enhanced Child Tax Credit program continued to offset the impact from the delta variant on consumption demand.
The headline spending number rose 0.6% on the month, following an upwardly revised 1.0% in August, according to the Bureau of Economic Analysis report on Friday. After adjusting for inflation, real spending saw a 0.3% increase in September compared to 0.6% in the previous month.
Some of the difference in spending month-over-month came from the decline in income. Personal income posted a sharp decline of 1.0%, driven by a significant drop in unemployment benefit payments, as pandemic-related unemployment benefit programs expired in early September.
We expect such a decline will have an impact on spending in the coming months as the recipients of those programs tend to have high marginal propensity to consume.
Elevated inflation in recent months has also put some pressure on spending. The good news is the PCE deflator—the Federal Reserve’s top inflation gauge—in September eased such pressure slightly, rising 0.3% on the month following a 0.4% increase in August.
At the same time, the core PCE deflator—excluding food and energy prices—also slowed to a 0.2% increase on the month compared to 0.3% previously.
Also in the report, household savings decreased to $1.34 trillion in September. This marked the first time that savings dipped below the pre-pandemic level at $1.4 trillion in February 2020.
The savings rate declined to 7.5%, also back to its pre-pandemic level in 2019, as households began to tap into their excess savings.
With more than $2 trillion of cumulative excess savings held by the public, we should expect spending to recover significantly in the last quarter of the year as consumers are heading into the shopping season.
Inside the report
Spending on goods was the main reason personal spending slowed in September, rising a modest 0.1% after posting a significant 1.0% gain in August on an inflation-adjusted basis.
Durable goods spending remained depressed at a 0.5% decrease, led by the declines in automobiles (3.0%) and furnishings and household durable goods (0.6%). Supply chain issues continued to be a drag on spending on autos, as the chip shortage has forced some manufacturers to cut back production.
Service spending increased 0.4% in back-to-back months as consumers started to spend more on transportation and recreation services, up 1.7% and 1.4% on the month respectively.
We expect that spending on services will continue to bounce back in the last quarter of the year as the delta variant continues to fade and pressure persists on goods supplies due to supply-chain disruptions.
On a year-over-year basis, the PCE deflator rose 4.4% in September following a downwardly revised 4.2% in August, while the core PCE deflator remained at 3.6%.
Similar to recent data from the Consumer Price Index report, prices for automobiles continued to lead the increases, up 14.1% year-over-year. Gasoline and energy prices are also up 41.1% compared to a year ago.
