U.S. Consumers Pare Back Spending in August

• Personal income was higher than expected with a 0.5% M/M gain in August, while personal spending was weaker than expected as it posted a flat reading. The prior month was also revised lower.
• Core PCE was in line with expectations with a 0.2% M/M gain, but it continues to push higher on an annual basis and now rests at 2.6% Y/Y. Other metrics of core PCE also look rather toasty.

Personal income was better than expected in August with a 0.5% M/M gain, but spending was flat in August which was worse than consensus expectations. In real terms, personal consumption expenditures were flat in August, which follows two consecutive months of negative readings. Clearly, with the softness in spending, whatever boost from the tax rebates was short-lived. Moreover, the fact that there were downward revisions to the July data, in conjunction with weak August spending numbers suggests that consumption for the third quarter is not looking particularly good.

Core PCE remains elevated, which is concerning. This is the Fed's preferred measure of inflation and even as the monthly gain was 0.2% which was in line with expectations, the annual rise was 2.6%. Moreover, on a three month annualized trend basis, core PCE also looks toasty with a 3.3% gain, which is the highest since April 2006. Likewise, on a six month annualized basis, it is 2.7%, which is also a cyclical high.

The fact that the savings rate rose is out of character for the U.S. consumer, who is otherwise used to profligate ways. It suggest that the headwinds and financial market turmoil is starting to impact consumer behaviour and force some saving. In August, the savings rate was 1.0%, which was a little more than half the pace of July, but it is still significantly higher than the savings rate seen through this past business cycle.

On balance, these data are suggesting that consumers are facing the reality of the current economic situation. They are paring back spending, as the labour market looks increasingly shaky and credit is becoming more difficult to get. At the same time, consumers must also contend with rising inflation which is eroding purchasing power. Given the lacklustre tone of personal spending in August, third quarter consumption looks rather weak.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.