KEY DATA: Consumption: -0.2%; Income: +0.1%/Employment Costs (Year-over-Year): +2.2%; Wages and Salaries: +2.1%; Private Sector: +2.3%
IN A NUTSHELL: “Household incomes are finally starting to rise but there is no rush to spend it.”
WHAT IT MEANS: Yesterday’s strong GDP report pretty much told us what happened with consumer spending during the summer and today’s report fills in the details about the monthly pattern. Very simply, there is no pattern. Consumption was flat in July, soared in August and fell in September. Part of that was a robust return to vehicle demand in August, which skewed the trend. But there were also ups and downs in the services and the nondurables components, so it is really hard to know what people have been thinking. The real issue, though, is can they afford to spend more. Two bits of information point to increases in incomes, but nothing great just yet. Personal income was up in September, but when adjusted for inflation, it was largely flat. That is, purchasing power went nowhere. Disturbingly, wages and salaries, the key to both spending and Fed policy, rose minimally during the month. That is important because the wage and salary component of the Employment Cost Index, an aggregate measure of compensation, has been accelerating. In the third quarter, private sector wages and salaries rose at the fastest pace in six years. Hopefully, the September moderation was just an aberration. We need greater increases in household incomes if the strong economic growth we have seen for the past two quarters can be sustained. Inflation remains totally under control.
MARKETS AND FED POLICY IMPLICATIONS: Fed Chair Yellen is looking for any sign that the tightening labor markets are finally causing wages to rise. That is not happening just yet, but the trend is in that direction. Worker compensation, especially in the private sector, is accelerating. It is not so high just yet that warning bells are being set off at the Fed, but another six months and we should be there. But the sluggish rise in wages in September is a warning that the pattern will not be clear-cut until employers start bidding for workers. Right now, that is happening only in a few industries, occupations and regions. It needs to be more widespread. The limited income gains imply that spending will continue to grow moderately at best. We need that to change if we are to get this economy into high gear. The key may be the holiday shopping season and if the consumer confidence numbers are any indicator, it could be really good. Today we saw the Thompson Reuters/University of Michigan’s Consumer Sentiment Index hit its highest level in over seven years. That came after the Conference Board’s Confidence Index also hit a seven-year high. Consumers are feeling good and it will only take a little more money to get spending to surge. As for the markets, it looks like investors actually think that economic fundamentals, not the Fed, will drive prices and if that is the case, people should be feeling pretty good right now.