 | Personal Income was Unchanged in October, Personal Consumption Declined 0.2% |
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| Posted Under: Data Watch • GDP • PIC |
Implications: Super storm Sandy struck today's data hard. Consumer spending fell 0.2% in October, the steepest drop in any month since right after the end of cash-for-clunkers in 2009. "Real" (inflation-adjusted) personal spending was down 0.3% in October (-0.5% including downward revisions for prior months) and only up 1.3% from a year ago. Incomes were unchanged in October as private-sector wages & salaries dropped 0.2%, also likely a result of Sandy. If we take all of the recent data at face value, our GDP model is tracking zero real growth in Q4. That's right, a big fat goose-egg. However, we are likely to see a rebound in the data for later in the quarter as the eastern seaboard recovers from Sandy. For example, we expect a surge in auto sales for November, which will be reported by automakers on Monday. As a result, Q4 should end up with slightly positive growth in the end. Assuming a political deal on the "fiscal cliff" sometime in late December or very early January, we expect real GDP growth of close to 3% next year. That includes boosts from farm inventory replenishment after this year's drought, as well as Sandy-rebuilding on the East Coast. Despite October's weak income number, real disposable income is still up 1.2% from a year ago, which is enough to keep pushing consumer spending higher. Meanwhile, households' financial obligations – recurring payments like mortgages, rent, car loans/leases, as well as other debt service – are now the smallest share of income since 1984. This allows consumers to stretch their income gains further. On the inflation front, overall consumption prices as well as the core PCE, which excludes food and energy, were both up 0.1% in October. Overall prices and core prices are up 1.7% and 1.6% respectively in the past year, versus the Federal Reserve's target of 2%. This is awfully close for a central bank running a very loose monetary policy. Expect higher inflation in the year ahead.
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