Personal income advanced 0.7% month-on-month (m/m) in October, above market expectations for a more modest gain of 0.4% m/m. Compensation of employees, which gained a solid 0.5% m/m, was behind the strong headline income reading. Government social benefits was another strong contributor with growth of 1.6% m/m that reflected one-time refundable tax credits issued by states.
Controlling for inflation and taxes, real personal disposable income was up a healthy 0.4% m/m in October.
Personal consumption accelerated from October, rising by 0.8% m/m – on par with the consensus forecast.
In real terms, spending was up 0.5%, with goods taking the lead. Spending on goods rose 1.1% m/m, led by a 2.7% gain in durables, while nondurable goods was up 0.3%. Services spending added 0.2% on the month, with growth supported by spending on health care, food services and accommodations, as well as housing and utilities.
The personal saving rate fell for the fourth month in a row from an already weak 2.4% (revised down from 3.1%) to 2.3% on the month. This is 5.3 percentage points below the 7.5% pre-pandemic average.
Inflation as measured in the personal consumption deflator eased to 6.0 % from 6.1% year-over-year, while core PCE inflation (excluding food & energy) softened to 5.0% (from 5.1%).
Key Implications
While the strong upswing in goods spending was largely priced into the consensus estimate after the retail sales report, spending on services remained a wild card. The moderate gain and positive revisions to previous months lifted the health care category to almost one percentage point above its pre-pandemic level. The only two categories that remain below their pre-pandemic levels are transportation (-3.0%) and recreation (-3.4%). Robust growth in October puts us on track for a notable upgrade in our forecast for real consumer spending in the final quarter of 2022: we now expect it to come in at roughly 3% (annualized).
Starting next year, we expect consumers to tighten their purse strings. First, a full year of dwindling purchasing power will make consumers more selective once the holiday season is over. Second, high interest rates and tighter credit conditions will make borrowing less palatable, limiting spending financed by credit. Finally, consumers’ pandemic savings build up has halved over the past year, and is on track to be exhausted by the end of next year should this trend continue. This suggests that real consumption growth will soften to a below-trend growth next year, making a case for the Fed to moderate “the pace of rate increases as soon as the December meeting”.
