U.S. Personal Consumer Spending Flat Despite Rise in Personal Income

Personal consumer expenditure (PCE) was unchanged in August following a 0.1% rise in July, which was revised down slightly from an initially estimated gain of 0.2%. Expectations had been for a stronger 0.2% gain in August. The disappointing increase in spending occurred despite income rising 0.5%, which was considerably stronger than the expected increase of 0.2% and almost fully reversed the 0.6% drop that occurred in July.

Overall consumer spending was flat despite the 1.4% rise in spending on durables. The main offset was a 0.6% drop in non-durables, with spending on services up only 0.1%. The impact of prices was minimal as the volume of consumer spending was also unchanged in the month and followed a 0.5% drop in July. On a real basis, strength was still concentrated in durables, which rose 1.6% in the month offset by declines in non-durables (-0.3%) and services (-0.1%).

The monthly increase in the August PCE price index moderated to 0.0% from 0.6% in July, reflecting an easing in energy price increases. On a core basis, prices were up 0.2%, which represented some easing from the 0.3% gain recorded in July. On a year-over-year basis, the increase in core prices rose to 2.6% from 2.5% in July.

Flat consumer spending on a volumes basis in August after a 0.5% drop in July makes clear that there will be a marked slowing in consumer spending from the 1.2% gain recorded in the second quarter as the impact of the fiscal stimulus wanes. In fact, today’s data are indicating the likelihood of a decline in the third quarter in this key expenditure area.

The support to growth from the fiscal stimulus package was always viewed as likely to provide only a transitory boost to growth with other factors, such as easing in the credit tightening, needed to sustain the gains. Recent developments clearly indicate that this is not happening. Today’s report will clearly be overshadowed by financial markets assessing the prospects of success of the U.S. Administration’s latest efforts to free up financial markets with the agreement over the weekend of the Troubled Asset Relief Plan (TARP). Success of this program in lowering borrowing costs is key to limiting the extent of any weakening in key expenditure areas such as consumption and investment through the end of this year and into 2009.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.