Fed to Continue With Rate Cuts

• Consumer spending and after-tax income both rose 0.2% in August before adjusting for inflation, both somewhat smaller than gains in recent months. 

• Both the overall PCE price index and the core PCE price index rose a very modest 0.1% in August. Inflation continues to move toward the Federal Reserve’s 2% objective.

• Real consumer spending and after-tax income rose 0.1% over the month. 

• There was an upward revision to the personal saving rate, good news for near-term spending growth. 

• Slowing inflation will allow the FOMC to further cut the fed funds rate this year and next year. 

• The outlook for consumer spending remains positive.

Consumer spending rose 0.2% before inflation in August from July, according to the Bureau of Economic Analysis. This was the smallest increase since January. Personal income also rose 0.2% over the month, with after-tax income also up 0.2%. Consumer spending growth continues at a solid pace but is gradually weakening as the labor market has softened somewhat. 

Inflation was very slow in August. Both the personal consumption expenditures price index and the core PCE price index, excluding volatile food and energy prices, increased 0.1% in August from July. On a year-ago basis the overall PCE inflation rate was 2.2% in August, down from 2.5% in July and a peak of above 7% in mid-2022. Inflation measured using the core PCE price index-the Federal Reserve’s preferred measure-was 2.7% in August. While this was up slightly from 2.6% in June and July, and above the Fed’s 2% objective, it is down from a peak of 5.6% two years ago. 

The personal saving rate fell slightly to 4.8% in August from 4.9% in July. But recently the saving rate was revised much higher; before the revision the saving rate was 2.9% in July. The upwardly revised saving rate means less pressure on consumers to slow their spending growth. 

Real (inflation-adjusted) after-tax income was up a modest 0.1% in August. Real (inflation-adjusted) consumer spending was also up 0.1% for the month. 

The August personal income and outlays report is further indication that the economy is on track for a soft landing. Core inflation continues to ease toward the Federal Reserve’s 2% objective, and should be there by mid-2025. Personal income growth has slowed as job growth and wage gains have eased, but continues to rise. Wages are now increasing faster than inflation. And with rising real incomes consumer spending continue to increase, but at a softer pace compared to earlier in the expansion. With the upward revision to the personal saving rate there is less concern that households will need to restrain their spending to build up their reserves. 

With inflation slowing the Federal Open Market Committee cut the federal funds rate by 50 basis points on September 18, the first cut to the policy rate since March 2020 during the pandemic. PNC expects additional rate cuts of 25 basis points at the FOMC’s two meetings later this year and then in 2025. The fed funds rate, which peaked in a range of 5.25% to 5.50% from mid-2023 to September, will decline to a range of 4.25% to 4.50% by the end of this year, and down to around 3.5% by mid-2025. 

Real household incomes and spending will continue to increase through the end of 2024 and in 2025 as the labor market remains solid. Growth will slow, however, with somewhat weaker job and wage gains. Falling interest rates will also support spending growth.  Another positive for consumer spending is rising household wealth, particularly for upper-income households, with rising stock prices and home values. Lower- and middle-income households are facing more stress after prolonged high inflation over the past few years. With consumer spending continuing to increase, the outlook remains positive for overall economic growth. 

Although personal income growth was softer in August compared to recent months, labor market income rose a strong 0.5% over the month; this is the most important component for consumer spending. Investment returns fell on the month. 

Nominal spending on durable goods fell 0.2% in August. Autos were a large drag, as sales jumped in July after the CDK Global cyberattack depressed sales in June; in August they returned to a more normal pace. Nominal spending on nondurable goods was down 0.1% on the month on lower energy prices. Nominal consumer spending on services rose 0.2%. After adjusting for inflation spending on both durable and nondurable goods was flat, while spending on services rose 0.2%. 

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.