September’s Rebound In Consumer Spending & Income

Personal income and spending jumped in September, offering an encouraging reversal from August’s sluggish pace. The revival was particularly strong for consumer spending. The numbers aren’t all that surprising in light of yesterday’s mildly upbeat GDP report for the third quarter. Surprising or not, today’s spending and income numbers reconfirm the statistical case for arguing that there was no sign of a recession in Q3. Deciding what happens in Q4 is guesswork, of course, but there seems to be a bit of momentum in the macro numbers these days and so a bit of optimism is the new new thing again… at least for the weekend.

The surge in consumer spending last month vs. August was certainly impressive. Jumping by 0.6% in September (roughly three times higher than August’s pace) suggests that a willingness to spend is alive and well in these United States. Nonetheless, there’s a potential danger lurking in the sluggish growth in disposable personal income. Indeed, the gap between income and spending has become unusually wide in recent months, implying that a day of reckoning may be coming. Spending after all is financed with income and while it’s possible for the two to go their separate ways for a time, eventually any chasm must close, or at least narrow.

The diverging trend between income and spending is clear if we look at rolling 12-month changes. Personal consumption expenditures are higher by more than 5% through September vs. a year ago. By comparison, disposable personal income advanced 3.2% over the past year. The two-percentage-point difference in income and spending is at the outer range of normal conditions. The implication: spending is due to fall, income is set to rise, or a bit of both. Something, in short has to give, if only a little.

It’s almost certain that a rebalancing in the relationship is near, but it needn’t be fatal. Private sector wages also staged a rebound in September, rising by 0.3%. That’s hardly a blow-out performance, but it’s a world away from August’s -0.2% stumble and it suggests that wage gains aren’t beyond the pale in this climate.
Looking at wages on a rolling 12-month basis signals that the trend for growth has momentum. The 4.5% rise over a year ago isn’t quite as strong as the years before the Great Recession, but the pace is well above levels that are historically associated with recessions.

The critical variable in all of this remains the labor market, of course. If there’s any hope of maintaining the momentum in income, spending and the wider economy, job growth will have to persist if not accelerate. September’s pace of job creation was relatively encouraging, but only in the sense that the labor market kept its nose up and avoided crashing. There’s still a thin line between recession and growth these days, but at least the edge remains in favor of expansion. But confidence that the expansion has legs is unusually dependent on the number du jour. So, by all means, take comfort in today’s spending and income report. We dodged a bullet in Q3. But don’t get too comfortable with the optimism just yet. The Q4 numbers are just starting to roll in.