Moderate Gain in Consumer Spending

Personal income fell 2.7 percent in August before inflation, with after-tax (disposable) personal income down 3.2 percent over the month. There was a 1.2 percent increase in worker compensation in August thanks to big job gains, but transfer payments fell almost 15 percent over the month as extra unemployment insurance payments of $600 per week expired at the end of July.

Personal consumption expenditures (consumer spending) rose 1.0 percent in August, a solid increase, but the weakest pace in four months. Spending on durable goods rose 0.9 percent over the month as households purchased more cars and other big-ticket items, but spending on nondurable goods fell 0.1 percent. Spending on services rose 1.4 percent in August.

Household income surged in the spring thanks to one-time stimulus payments to many households and extended and expanded unemployment insurance benefits. After-tax income jumped 12.2 percent in April, even as the economy was losing tens of millions of jobs. Since then labor income has started to come back as the job market has begun recovering, but overall household income has declined as transfer payments have fallen. After-tax income in August was up 2.8 percent from February, but was down 9.0 percent from April, when stimulus payments were at their peak.

Aid from the federal government has allowed households to increase their spending, even with continued high unemployment. After falling 18 percent from February to April (before inflation), consumer spending surged 17 percent between April and August, although it is still 4 percent below its February level. But the pace of spending growth has slowed after the initial boost from reopening, and with the lack of additional stimulus and millions still unemployed due to the Viral Recession, spending growth will be much weaker going forward.

The personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, rose 0.3 percent in August, slower than the pace of inflation in June (0.5 percent) and July (0.4 percent). The core PCE price index, excluding volatile food and energy prices, was also up 0.3 percent in August. On a year-ago basis overall PCE inflation was 1.4 percent in August, up from 1.1 percent in July and 0.5 percent in April. The core PCE price index was 1.6 percent year-over-year in August, up from 1.4 percent in July and 0.9 percent in April. Inflation has picked up from its trough in the spring during the worst of the recession, but is still below the central bank’s 2 percent objective. Inflation will remain low over the next couple of years with businesses holding little pricing power given huge swathes of excess capacity throughout the economy.

With moderate inflation, real (inflation-adjusted) after-tax income fell 3.5 percent in August. Real consumer spending increased 0.7 percent over the month.

Consumer spending accounts for about two-thirds of U.S. GDP. After an unprecedented decline in consumer spending in March and April as many businesses closed and tens of millions of Americans lost their jobs, household purchases have come roaring back thanks to re=openings, stimulus payments, and extremely strong job growth. But consumer spending in August was still down 4 percent from February, before the Viral Recession. With personal income falling as stimulus fades, consumer spending growth will be much slower through the rest of this year and in 2021. PNC’s baseline economic outlook includes additional fiscal stimulus later this year, including aid to households. But if Congress and the Trump administration are unable to agree on that aid, spending growth would be even weaker.

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