TD Securities Dataflash
TD: Spending momentum likely to ease in Q3, but core inflation perking up
· Personal income suggests a smaller consumer contribution to Q3 GDP growth than during Q2, with real personal spending slipping 0.1% m/m.
· Inflation did show signs of perking up, with core PCE accelerating to 1.7% y/y from 1.6% y/y.
· While the August personal income and spending report hints that consumption will provide a more modest contribution to Q3 growth momentum, markets will look closely to next week’s payroll and ISM reports to help refine the odds of a December rate hike (which are currently priced at 45%).
The August personal income and spending report came in at the lower end of expectations, with incomes rising 0.2% m/m after last month’s 0.4% m/m gain. Spending nevertheless came in below consensus estimates for a 0.1% m/m rise, remaining flat during the month even as the 0.3% m/m gain in July was revised up to 0.4% m/m. There was also pronounced softness in real personal spending activity, which slipped 0.1% m/m following the prior month’s 0.3% m/m gain. The 3m annualized pace of real consumer spending edged lower to 3.8% from 4.1% last month, suggesting that consumption (a key factor supporting Q2 GDP growth) is likely to provide less support to Q3 GDP growth. The data mirrors softer August retail sales activity, which has shown US consumers paring back purchases during the month, with the savings rate ticking modestly higher to 5.7% from 5.6%.
The inflation front offers a modestly more encouraging picture. Headline PCE edged 0.1% m/m higher (0.144% before rounding) after the prior month’s flat print and the pace of headline inflation accelerated to 1.0% y/y from 0.8% y/y. Core inflation also saw gains, advancing 0.2% m/m (0.178% before rounding) as the annual pace of core inflation edged higher to 1.7% y/y from 1.6% y/y. The 3m annualized pace core inflation momentum also showed some stabilization. Interestingly, medical inflation did not show acceleration in the PCE report despite a jump in the CPI report earlier this month.
Overall, the data suggests some likely softening in consumers’ contribution to spending growth during Q3 following very strong Q2 spending. Given the Fed’s increased emphasis on economic data for gauging the likelihood of a rate hike later this year, we expect the focus to turn toward next week’s payroll and ISM reports, which should show some improvement from August levels.