September's Weak Income and Spending Data May Push Fed to Move

Income and spending
Income and spending

September's personal income and spending report showed again that the U.S. economy is suffering from a lack of demand, in large part due to the nation's high 9.6% unemployment rate. The poor report will likely support the argument of Fed officials who want to use continued low interest rates and more quantitative easing to increase demand to get the U.S. economy to grow faster.

The biggest concern is that personal income unexpectedly fell 0.1% in September, after a Bloomberg survey had forecast a 0.3% rise. Also, August's personal income stat was revised downward to an increase of 0.4%, from the previously released 0.5% rise. Personal income was 0.2% higher in July.

The September dip is worrisome because rising incomes are needed increase disposable income -- cash that Americans can use to invest or spend. However, consumer spending was also lower than expected in September, rising just 0.2% -- one-half the 0.4% Bloomberg estimate. Consumer spending rose 0.5% in both August and July.

Dangerously Close to Deflation

If the deceleration in consumer spending continues in the months ahead, it will weigh on GDP growth, given the large role this category plays in the U.S. economy.

In addition, a key indicator of inflation that the Fed closely monitors showed a U.S. price environment that's dangerously close to deflation. The personal consumer expenditure (PCE) index rose just 0.1%. However, the more-telling core PCE index -- which excludes often-volatile food and energy prices -- was flat. That's below the 0.1% increase projected in the Bloomberg survey.

The core PCE index is up just 1.2% on a year-over-year basis, down from the 1.3% year-over-year rate recorded in August. That's just about as low as the Fed wants year-over-year core inflation to be.

One additional September income/outlay statistic reflected a mixed result for the U.S. economy. The savings rate fell to 5.3% in September from 5.6% in August, but it's still at a relatively high rate. On the one hand, a high savings rate is beneficial in the long term because it will increase the supply of capital available for investment -- and help rebuild Americans' nest eggs.

However, in the short term it takes dollars away from consumption, making it hard for the U.S. economy to grow at an adequate rate.

No Pressure on Wages

September's personal income and consumer spending reports represent a net negative for policymakers' effort to get the U.S. economy to grow faster and create more jobs. The 0.1% personal income decline is typical of a labor market where many job segments are exhibiting little "wage leverage." Employers are confident that employees won't be seeking a promotion or pay increase because so few jobs are available. With no pressing reason to hike wages, subpar income growth is the result.

Plus, Americans are aware of their stagnant incomes, and they're not spending as much, leading to smaller consumer spending increases such as September's 0.2% increase.

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Finally, the lack of income growth and consumer spending has taken a great deal of demand out of the U.S. economy, giving companies little pricing power -- evident in the core PCE index's drop to a dangerously low 1.2% increase. Some companies are being forced to cut prices to move inventory and/or attract buyers. If price cuts become pervasive, that could lead to deflation, a protracted, systematic decline in prices and wages.

While some Fed officials may argue that they see long-term improvement in both income and consumer spending, the September report is more likely to aid the Fed policymakers who believe the central bank needs to do more to stimulate the world's largest economy.

Combine the September income and spending reports with the current sluggish job growth, and the picture is one of an economy that needs higher levels of employment, investment and spending. And soon.