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Personal income and spending rose moderately in September according to Thursday’s report from the Commerce Department. Consumer spending is spurred on by the robust labor market, although the core-personal and consumption expenditure (PCE) index indicates sub-target inflation.

Key Takeaways

• Consumer spending rose 0.2% in September with increases in motor vehicle purchases and healthcare spending.
• Growth in consumer spending slowed from 4.6% in Q2 to 2.9% in Q3 according to yesterday’s GDP report.
• Core-PCE, the Fed’s preferred measure of inflation, came in at 1.7% after a 1.8% reading in August.

Consumer spending, which accounts for two-thirds of the US economy, remains healthy at 0.2% growth in September. The strong labor market has allowed for robust spending despite worsening economic conditions worldwide and recessionary pressure building in the US. Business investment, which has now contracted for two quarters in a row, may spill over into labor and consumer spending and have a negative impact in the coming months.

While spending rose, wages remained flat, which could indicate an impending loss of momentum in consumer spending. August spending was revised upward from 0.1% to 0.2%.

Annually, Q3 consumer spending came in at 2.9%, a step down from the rapid pace of growth seen in Q2 at 4.6%. The economy grew at a pace of 1.9% in Q3, above expectations of 1.6% but below Q1 and Q2 growth figures. The ongoing trade war and worsening slowdown seen worldwide continue to impact US economic growth, although the economy continues its record-breaking period of expansion which now stands at over a decade.

JPMORGAN: "Consumption growth cools and core PCE has a soft month ... we continue to see downside risk to our forecast for 1.75% real GDP growth in 4Q."

— James Pethokoukis (@JimPethokoukis) October 31, 2019

Inflation

The Federal Reserve implemented a third rate cut for this year yesterday, as expected, but indicated that the monetary easing policy will now be put on pause. The Fed cut interest rates for the first time in a decade in June. Fed Chair Jerome Powell now anticipates moderate economic growth, helped along by “solid household spending and supportive financial conditions.”

Rates have been cut to hedge against recessionary pressures such as low inflation, which remains tame. Consumer prices in the personal consumption expenditures (PCE) price index saw no change again last month with a -1.3% drop in the cost of energy goods and services.

Inflation was tame in September. Consumer prices as measured by the personal consumption expenditures (PCE) price index were unchanged for a second straight month in September as the cost of energy goods and services dropped 1.3%. The PCE price index rose 1.3% annually in September and 1.4% annually in August. Excluding the volatile components of food and energy, the core-PCE price index was also unchanged last month after a 0.1% rise in August. Core-PCE is the Feds preferred measure of inflation which now stands at 1.7%, below the central bank’s target range of 2%.

Market Reaction

Gold prices are trading significantly higher today with 1.63% gain. Spot gold last traded near the top of today’s range at $1,511.20/oz with a high of $1,513.66/oz and a low of $1,482.20/oz. The upward momentum is likely a result of the off-target PCE report and the results of yesterday’s Fed meeting which saw the benchmark rate of interest drop for the third time this year.