- Personal income declined by 0.7% month-on-month in October, dropping from a 0.9% month-on-month gain in September and missing market expectations for a small gain (+0.1%). Real disposable income was also weak, contracting by -0.8% on the month. The softness reflects the steady decline in income support programs. On the positive side, compensation and proprietors’ income increased at +0.7% and 1.2% month-on-month, respectively.
- Spending increased by 0.5% month-on-month, a tick above market expectations (+0.4%), but 0.6% lower than previous year. In real terms, spending increased by 0.5% month-on-month but declined 1.8% year-on-year, and 2.2% below February levels.
- The personal saving rate declined to 13.6% from 14.3% in September and a peak of 33.6% in April, but is still above last year’s 7.2%.
- Both headline and core PCE deflators remained flat month-on-month, increasing year-on-year by 1.4% and 1.2%, respectively.
Key Implications
- The decline in personal income came in steeper than anticipated, as government income support programs continue to run out of steam. CARES Act leftover programs that extend some benefits and support gig workers and the self-employed are set to expire on December 31st.
- In the previous six months, strong personal income was an important driver of the recovery in spending. Conversely, the softer-than-expected reading may weigh on Americans’ disposition to splurge during the holidays. A spike in infections, measures to contain it and more cautious consumer behavior suggest a difficult holiday season.
- Uncertainty about the trajectory of the pandemic over the next few months remains elevated, especially following the Thanksgiving holiday. Hopes that legislators will deliver a second deal are also fading. The silver lining is positive news on the vaccine that provides hope of a solid economic rebound once the health crisis is finally behind us.
