U.S. CONSUMER JUST KEEPS ON SPENDING IN SEPTEMBER
October 30, 2006
U.S. personal income up 0.5% in September,
spending up 0.1%, but real numbers much
stronger – no weakness in consumer spending
here
Core PCE deflator up 0.2%, bringing YoY
reading to 2.4%, but August revised up to 0.3%
This morning’s data on U.S. personal income and outlays painted a picture of a U.S. consumer that is holding up well, and inflation pressures, though in line with expectations for September, are still running at elevated levels. While personal income was up by 0.5%, real personal disposable income growth came in even stronger with a 0.8% gain – and
excluding the Katrina-induced distortion last year and the impact of the late-2004 Microsoft dividend payment, that was the strongest monthly increase since November 2003.
Similarly, while consumer spending appeared weak on the surface with a 0.1%
gain – below expectations for a 0.2% tally – real spending was up by a robust 0.4%, albeit after a 0.1% decline in the previous month. Visibly, there was no evidence that consumers south of the border are throwing in the towel. And, the savings rate actually improved on the month. Meanwhile, the core PCE deflator – typically the most important focus of the report – came in at 0.2%, and although that was in line with expectations, the previous month was revised up a notch to 0.3%. Nonetheless, the year-over-year measure did slip to 2.4% from 2.5% in August, and the 3-month annualized trend is now running at 2.3%. There is certainly nothing here to convince the Fed that it can sit back and relax.
The real issue for the U.S. economy is whether thesharp slowdown in the housing market will spill over to other sectors of the economy – and most notably consumer spending. And, certainly, there was no evidence of that in today’s data – all the contrary.
The weakness in real GDP growth in the third quarter was largely the result of a massive plunge in residential construction. But consumer spending continued to advance at a respectable 3.1% annualized clip. With today’s data, consumer spending looks like it is on a pretty solid footing moving into the final quarter of the year, at least for now. Although the correction on the housing front is far from over, the drag in future quarters is unlikely to be quite as dramatic as the third-quarter result. Consequently, whether or not growth starts to firm up from this point on depends on the extent to which consumer spending moderates in response to the evaporation in housing wealth.
Our best bet remains that spending will slow sufficiently to keep GDP growth hovering around 2% for the next couple of quarters – and that in turn will be enough to prompt the Fed to ease. But that view is contingent on the consumer losing some traction from this point on.
R.Paul Chadwick
Manager of Residential Mortgages,
TD Canada Trust
Phone # 905 334 4066
Pager # 1 866 767 5446
Fax # 905 332 1619
email: paul.chadwick@td.com
web: http://www.tdcanadatrust.com/msf/paulchadwick
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