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Spending increased in September despite a slowdown in income gains growth resulting in the lowest savings rate of the year. Inflation is on target as per the Federal Reserve policy outlined for the year aimed to gradually increase interest rates.

Key Takeaways

• Purchases are up 0.4% from the previous month
• Purchases account for 70% of the economy
• Income gains are up 0.2%, less than projected and the lowest in over a year
• Americans saved 6.2% of disposable income, matching the lowest level since 2013
• The current pace of spending is likely unsustainable with current wage growth

The increase in purchases boosted quarterly consumption and contributed to what Friday’s report revealed to be the fastest gross domestic product growth increase since 2014. The Labor Department’s monthly jobs report is projected to reveal a jobless rate of 3.7% with 193,000 workers added.

Durable goods spending rose 1.8% (adjusted for inflation) after a 0.9% increase in the previous month while nondurable goods advanced 0.2% and household outlays on services were unchanged after a 0.3% increase. Healthcare spending has increased while food, services, and spending on accommodation has declined.

Influential Factors

Much like what was seen with the reports on home sales, hurricane season may have also impacted the economy in terms of income gains with the cool down potentially related to disruption of work and services during and after Hurricane Florence.

The rise last in income gains was particularly seen with motor vehicles and parts, something that will likely be closely examined in the next report for comparison.

The ongoing global trade war being waged by the Trump’s administration may also have an effect, with prices increasing in certain sectors as well as hesitancy to invest among companies due to marketplace uncertainty. However, consumer outlook remains positive due to a strong job market and tax cuts allowing for increased spending in Q4. Workers have more take-home pay and wages have seen growth with the recent decrease in unemployment and employment levels the highest since 1969.

While these factors contribute to spending power, the rate of inflation has had a cooling effect. Inflation rose 0.1%, up 2% from last year with core prices (excluding food and energy) up 0.2% compared to an estimated 0.1%. All told, real disposable income (earnings adjusted for taxes and inflation) is at a five month low after advancing 0.1% last month. The Fed is expected to implement another rate hike before the year is out.

Economists’ Outlook

The increase in spending is not seen as sustainable by many economists.

"It remains to be seen how long the spending spree can continue," said Sung Won Sohn, chief economist at SS Economics in Los Angeles. "The stimulus from the tax cut has plateaued. Rising interest rates and volatile stock markets are having a psychological as well as a real effect."

Economists polled by Reuters predicted a 0.4% increase in September’s consumer spending, with the true figure adjusted for inflation being 0.3%. Strong consumer confidence creates short term conditions for continued growth moderation expected over the coming year.

"We expect consumption growth to moderate in first half of 2019 as the boost from the tax cuts fades, but in the near term favorable fundamentals are likely to translate into another strong holiday shopping season," said Berenberg Capital Markets economist Roiana Reid.