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PNC Senior Economist Bill Adams: Personal Income Fell Sharply in September as UI Benefits Lapsed

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saving rate back to pre-crisis normal; consumer spending slow but will pick up in coming months

  • Personal income fell sharply in September as pandemic-era unemployment benefits lapsed.
  • Personal consumption expenditures rose, but slower than earlier in 2021. Delta slowed the growth of services spending in September, and spending on durable goods fell due to auto supply chain problems.
  • Inflation was slower in September and August than in the March-to-July surge.
  • Consumer spending should pick up in coming months as pandemic fears lessen and supply chain problems abate, and inflation should stay slower than in the second quarter’s surge.
  • We expect the Federal Open Market Committee to announce the beginning of a taper of the Fed’s quantitative easing programs at their decision next Wednesday.

Personal income dropped a sharp 1.0% in September on a 7.0% drop in personal current transfer receipts, the category of income that includes unemployment insurance benefits and other government stimulus. Wage and salary income rose a solid 0.8%, and supplements to wages and salaries rose 0.3%. With taxes higher on the month, disposable personal income fell 1.3%.

Personal consumption expenditures rose 0.6% in September after an upwardly-revised 1.0% increase in August. In September, personal consumption expenditures on goods rose 0.5%, with spending on durable goods down 0.2% (shortages of new autos weighed on durable goods sales in the month) and spending on nondurable goods up 0.9% largely reflecting higher food and fuel prices. Spending on services rose 0.6%, unchanged from August. Personal consumption expenditures on services grew more than 1% per month between March and July, then slowed in August and September as the Delta variant made consumers warier about venturing out of the house.

Personal consumption expenditure growth should be faster in coming months than in the third quarter. The drag on personal consumption expenditures from Delta is likely to fade as cases and deaths continue to fall and Americans again get more confident about venturing out. And auto supply chain problems have started to abate, which will allow catch-up growth in spending on durable goods.

With income down and spending up, the personal saving rate fell in September to 7.5% from 9.2% in August. The saving rate is close to its pre-crisis level after surging in 2020 and early 2021. The saving rate is a measure of the flow of income into savings, not the stock of accumulated savings; Americans still have huge amounts of savings from accumulated earned income, stimulus payments, and capital gains built up during the last year and a half, which will fuel strong consumer spending into 2022.

After surging in the second quarter, inflation slowed in the third and stayed cooler in September. The price index for personal consumption expenditures rose 0.3% in September from August; this matched the August pace but was slower than the March to July period. Prices of goods rose 0.5% in September and prices of services rose 0.2%. The price index of personal consumption expenditures excluding food and energy a.k.a. core PCE inflation was 0.2% in September. Adjusted for inflation, real disposable personal income fell 1.6% in September, while real personal consumption expenditures rose 0.4%.

August and September’s slower inflation is consistent with the Fed’s view that most of the 2021 price surge was “transitory.” That means they expect prices to stay high and in fact continue to rise, but to rise at rates near their historic norms and not at those seen in the second quarter. The Fed is expected to announce the beginning of a taper (reduction) in its purchases of government-backed bonds at its next decision on November 3, but financial markets expectations for the Fed to start hiking its short-term policy rate in mid-2022 look way too overeager to me. PNC forecasts for inflation to slow further by mid-2022 as supply chain dislocations improve, allowing the Fed to wait until late 2022 to begin raising the fed funds rate from its current near-zero level.

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.

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