US consumer spending, which accounts for about 70% of the economy, was the key driver of GDP growth in the third quarter. In fact, US real GDP rose at annual rate of 3.5% in the quarter, helped by the strongest jump in consumer spending in about four years.
As the spending and income data for September illustrate, personal spending ended the third quarter on a very strong note, partly because it was financed by a decline in the personal savings rate. Indeed, the savings rate, which dropped to 6.2% in September, has fallen steadily this year and reached its lowest level last month.
Personal income in September rose only 0.2% and was likely depressed by Hurricane Florence. The income data were also likely constrained by Hurricane Michael.
In real terms, US consumer spending rose by an inflation-adjusted 0.3% in September spurred on by increased spending on health care services and motor vehicles.
The Federal Reserve’s preferred measure of inflation rose 0.2% between August and September but returned to the central bank’s 2% y/y (annual) target after having been slightly elevated in August. The Fed’s interest rate game plan will not change since inflation is right on the 2% target.
In addition, while personal incomes rose 0.2% in September, about one- half of that increase was wiped out by inflation.
Finally, the current pace of personal spending is clearly not sustainable, since the incremental impact from the tax cuts is nearly over. Indeed, many Americans are realizing they have hardly benefitted from the massive tax and spending stimulus that was lavished on the US economy by the Trump Administration. There hasn’t been an acceleration in wage and salary incomes. The slow 0.2% growth of personal income in September is a symptom of this reality. Moreover, the weaker stock market will likely be another constraint on future personal spending.
