Real Consumption Growth Falls

In August, real disposable personal income growth was solid, but real consumption growth weakened. That signals a decline in confidence as was shown in the August University of Michigan report. Consumption growth in the PCE report wasn’t consistent with the solid retail sales report. 

As you can see from the chart below, real disposable income growth is in a downtrend, but it’s not as bad as the last slowdown. Real consumer spending growth is also in a downtrend as it is in a similar range to the last slowdown even though income growth isn’t as bad.

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It’s good to see income growth higher than consumption growth. It signals the savings rate rose. To be clear, it’s not good for near term economic growth for consumption growth to fall. But if it is falling, I’d rather see solid income growth and a rising savings rate. That way once confidence returns, there will be a burst in spending growth. It appears the trade war took a bite out of consumption growth. This might motivate President Trump to make a deal in early October.

Let’s look at the specifics of the PCE report. Monthly personal income growth was 0.4% which met estimates and accelerated from the 0.1% growth in July. An easy comp makes growth look better than it was. As the chart above shows, real disposable personal income growth improved 5 basis points to 3%. On a rounded basis, there was no increase. At least those numbers were better than consumption growth which whiffed on estimates. 

July monthly consumption growth was revised from 0.6% to 0.5%. Even with that negative revision, monthly growth in August was 0.1% which missed estimates for 0.3% and missed the low end of the estimate range which was 0.2%. Usually, this report doesn’t have major misses or beats, so this was a relatively large miss.

Yearly real personal consumption growth was 2.27% which was a decline of about 23 basis points from July. That’s not a huge decline, but the July reading wasn’t that strong, so it looks bad. This was the weakest growth since the terrible December report which only had 1.69% growth. That was the weakest growth rate since January 2014. This decline in growth isn’t correlated with the increase in retail sales growth. Real consumption growth wasn’t driven lower by inflation either. It was a nominal weakness.

Savings Rate Rises

Because of the gap in income and consumption growth, the savings rate increased. It was up from 7.8% to 8.1% which is the highest reading since June as you can see from the chart below. The decline in confidence may have driven this. 

However, don’t fall into the trap of thinking this was a huge increase and things are collapsing. The savings rate peaked at 8.8% in February, possibly because of the government shutdown. Consumers are less uncertain now than they were then. 

Also, keep in mind the huge revisions we’ve seen in this metric over the past few quarters. The savings rate is the result of other metrics. It’s not a separate survey. Therefore, I wouldn’t overreact to this small change. Investors should be more concerned with consumption and income growth.

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Inflation Isn’t An Issue

Just as expected, inflation wasn’t an issue despite the worries after the strong core CPI reading. Headline monthly PCE inflation was 0% which missed estimates of 0.2% and July’s reading of 0.2%. Yearly headline PCE inflation was just 1.4% which met July’s reading and missed estimates by 0.1%. Core PCE inflation was a bit stronger but wasn’t enough to change the Fed’s rate cut trajectory. There will likely be another cut this fall. 

If the economy sees a cyclical turnaround, there will be an inflation problem because core PCE comps will get much easier soon. Specifically, monthly core PCE inflation was 0.1% which missed estimates for 0.2%. And July’s reading of 0.2%. Yearly core price growth was a bit stronger as core PCE met estimates of 1.8%. July’s reading was revised higher from 1.6% to 1.7%.

2-year core PCE inflation stack was basically flat. Yearly improvement was all about comps. In August 2018, core PCE fell 11 basis points to 2%; in this report, core PCE rose 12 basis points to 1.77%. In terms of comps, October will be a bit easier and starting in 2020, comps will get much easier. Remember, we don’t want to see above 2% core PCE because then the Fed will be forced to end its rate cut cycle. We might see above 2% core PCE early next year which has been a very rare sight in this expansion.

Friday Data Sends GDP Estimates Lower

Because of the weak consumption growth reading and the weakness in the durable goods orders report, which I will describe in a future article, Q3 GDP growth estimates plummeted. Oxford Economics lowered its estimate from 1.8% to 1.3%. Morgan Stanley lowered its estimate from 2.1% to 1.5%. And Macroeconomic Advisors lowered their estimate to 1.6% from 2.2%. Median estimate measured by CNBC is still 2%.

Atlanta Fed GDP Nowcast & ECRI Leading Index’s Growth Improve

It was very exciting to see the Atlanta Fed GDP Nowcast because of all the strong housing reports that have come out since its last update. However, the weakness in real consumption growth ruined the party. 

As you can see from the chart below, the Atlanta Fed’s projection only rose from 1.9% to 2.1%. I see growth coming in between 1.7% and 2.2%. PCE report dampened my optimism which existed because of the housing data.

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ECRI leading index’s growth rate didn’t disappoint as it isn’t affected by old data from August. Growth improvement was all about the easier comp as the index was steady at 146.6 and the yearly growth rate improved from -1.5% to -0.2%. This doesn’t suddenly make me hugely bullish on the economy in early 2020. I’m leaning in the direction of expecting a cyclical upturn, but my expectation needs to be supported by more data. A trade deal with China or just an end to the tariffs would go a long way towards improving my expectations.