; Inflation Still Low
Nominal (before inflation) personal income rose 0.9 percent in September, after falling 2.5 percent in August. Labor market income rose 0.8 percent over the month as the economy continues to add jobs during the recovery from the Viral Recession, and there was also an increase in personal income from business profits. There was a very small decline in income from transfer payments from the government as the number of people receiving unemployment benefits continues to decline. After-tax income also rose 0.9 percent in September.
After-tax personal income jumped by almost 13 percent in April from February, even as employment fell by more than 22 million over those two months, as the government sent out one-time stimulus checks to most households, made more people eligible for unemployment insurance, and boosted unemployment benefits by an extra $600 per week. Personal income has fallen since then, notwithstanding the September increase, as there have been no more stimulus checks and bonus unemployment insurance payments have expired, although rising labor market income as employment has rebounded has somewhat offset the reduction in transfer payments. Personal income in September was 4.5 percent above its February level, before the pandemic, but was down 7.5 percent from April, when most households received their stimulus payments.
Consumer spending increased 1.4 percent in September from August, before inflation, the fifth straight monthly gain. Spending on durable goods rose 3.0 percent over the month, while spending on nondurable increased 1.5 percent and spending on services rose 1.1 percent. Consumer spending fell by more than 18 percent from February to April as many businesses closed in the early stages of the pandemic and shoppers stayed home. Consumer spending was up more than 20 percent in September from April, but was still 2 percent below its February, pre-pandemic level. Consumer spending on durable goods in September was above its pre-pandemic level and spending on nondurable goods was almost back to its February level, but spending on services was still more than 6 percent below where it was in February.
With consumer spending up more than after-tax income in September, the saving rate fell to 14.3 percent, from 14.8 percent in August. The saving rate is still far above February’s 8.3 percent rate; it soared to 33.6 percent in April, the highest saving rate on record, as income jumped thanks to transfer payments and households were unable to make many purchases because of restrictions on economic activity. The high saving rate gives households a financial cushion as the unemployment rate in September was 7.9 percent, well above the 3.5 percent rate in early 2020.
The personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, rose 0.2 percent in September from August. The core PCE price index, excluding volatile food and energy prices, was also up 0.2 percent over the month. On a year-over-year basis overall PCE inflation was 1.4 percent in September, up from 1.3 percent in August and 0.5 percent in April and May. Core PCE inflation was 1.5 percent year-over-year in September, up from 1.4 percent in August and 0.9 percent in April.
With modest inflation in September, real (inflation-adjusted) after-tax income rose 0.7 percent in September from August. Real consumer spending was up 1.2 percent over the month.
Personal income and consumer spending have been on roller coasters this year, but now the ride is entering the station. Personal income soared during the late winter and early spring as stimulus spending more than offset the decline in job market income from the pandemic. It is unprecedented to have a huge increase in household income in the teeth of a recession. Household income has been falling since April, but is still above its pre-pandemic level, even as the labor market is far from a full recovery. Consumer spending plunged in March and especially April as businesses closed down and shoppers stayed home, but has made up most of those losses since then. But there has been a noticeable shift in consumer spending since the spring, away from services and toward goods.
The paths of personal income and consumer spending will depend on whether Congress passes additional stimulus funding. Without further stimulus, personal income will continue to decline into 2021, as the loss of transfer payments will offset income gains from more jobs. So far consumer spending has rebounded sharply, but this recovery could be at risk without additional stimulus, as households with unemployed workers find themselves stretched financially heading into the holiday shopping season. Consumer spending is unlikely to outright decline if Congress does not provide additional stimulus, but its recovery would be much weaker. And personal income and consumer spending could also take a big hit if the pandemic continues to spread and states re-impose restrictions on economic activity in response. One big positive for consumer spending over the next year will be continued very low interest rates.
Inflation has picked up from the worst of the downturn, but remains well below the Fed’s 2 percent objective. The central bank recently changed its policy framework so that it is aiming for inflation that averages 2 percent over time; given that inflation has been below 2 percent for most of the period since the Great Recession more than a decade ago, that would argue for inflation of somewhat above 2 percent for at least a couple of years. Fed officials have said they are likely to keep their fed funds policy rate in its current, near-zero, range until inflation hits 2 percent; PNC does not expect the central bank to increase the fed funds rate until at least 2024. Inflation is likely to remain low in the near term given still-weak demand for many goods and services, wide swathes of excess capacity throughout the economy, and few wage pressures given high unemployment.
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