Income Spending and Inflation

October 31st, 2014 9:34 am | by John Jansen |

Via Millan Mulraine at TDSecurities :

The pace of personal spending declined for the first time since January, with nominal PCE falling 0.2% m/m in September, following the 0.5% m/m gain the month before. In real terms, spending activity was also weak, falling 0.2% m/m. The disappointing performance in real spending in September suggests that this component (which account for two-thirds of overall economic activity) ended the quarter on much softer footing than previously thought, providing a very weak hand-off to Q4. As such, we continue to feel comfortable about our current base-case expectation for the pace of GDP growth to slip to around 2.5% in Q4, with the risks to that call beginning to tilt to the downside. Income growth also decelerated on the month, rising at a relatively modest 0.2% m/m pace (down from 0.3% m/m the month before). However, personal disposable income was relatively weak, rising at a very tepid 0.1% m/m pace. Despite this, the savings rate rose modestly to 5.6% 5.4%, marking the highest print on this indicator since February 2013.
On the inflation front, the story was somewhat mixed. The pace of core PCE inflation remained quite tepid, rising at a very weak 0.1% m/ pace (up 0.120% as three decimal places), keeping the annual pace of inflation unchanged at 1.5% y/y. However, the accompanying ECI report provided some indication of a modest up drift in inflationary pressures, as the headline ECI index posted a higher than expected 0.7% q/q rise. The market consensus was for a more modest 0.5% q/q rise. The increase follows a similar gain the month before, and the rise was on account of gains in wages and salaries (up 0.8% q/q in Q3 versus +0.6% q/q in Q2), while the rise in other benefit costs decelerated to 0.6% q/q from 1.0% q/q the prior quarter. In effect, the ECI report provides some indications that wage pressures may be drifting higher and even though it remains relatively weak at 2.1% on a year-ago basis (well below the 2.5% y/y to 3.0% y/y pace during the pre-crisis period), this is the highest mark on this indicator since Q1 2009.
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