Saving Remains Barely an Afterthought

• Nominal Household Income growth accelerated in October 2022, posting its strongest gain since October 2021.

• Topline inflation maintained its recent pace above 4.0% annualized monthly gains.

• Consumer spending growth bounced in October 2022 after having slowed in Q3.

• The savings rate among U.S. households is dismally low, falling further in October 2022.

Nominal personal income rose 0.7% in October 2022. Wages and salaries maintained their contribution to this gain, while rising interest rates increased their influence on household income at 1.0% for the month versus 0.4% in September. Household income continues to be spent back into the U.S. economy thanks to a mix of inflation’s demands and consumer habits that seem to bend, but not break. The Federal Reserve’s plan to continue raising rates in December and through the first quarter of 2023 in pursuit of “Demand Destruction” is well-supported by this month’s housing income and spending report.

Nominal consumer spending increased by 0.8% in October 2022 versus September. Goods spending took the reins for the month, jumping by 1.4% for the month of October alone – well above the gains, and even modest declines, that goods spending had seen throughout much of 2022. Spending on durable goods rose 2.1%, while services spending growth receded somewhat, gaining 0.5% for the month.

The end of the summer travel and spending season provides a solid reasoning for services spending to fall back somewhat, as colder temperatures flat-out prevent spending some activities and the collective fervor for renewed travel may have finally worn thin. It must be noted, however, that a shift back toward big-ticket household durable goods spending could represent a classic signal of inflation’s self-perpetuation. When consumer see prices constantly rising, they tend to buy now rather than risk a higher price in the future. The coming months’ spending trends will offer a better perspective on this hypothesis than October’s single-month snapshot can provide.

Inflation, according to the Federal Reserve’s preferred Personal Consumer Expenditures (PCE) Deflator index, eased somewhat in October 2022 once subtracting the influence of food and energy costs, that is, the Core measure. Topline PCE Deflator inflation was up by 0.3% for the month, which matches the pace seen in August and September. This translates to a 6.0% year-over-year pace. The Core measure rose by 5.0% for the year through October after gaining 0.2% versus September 2022 alone.

A modest easing in food prices helped to cool Core PCE inflation in October, while energy prices resumed gains – increasing by 2.5% for the month after three (3) consecutive monthly declines throughout 2022Q3. Oil prices fell throughout the month of November, and so the October gain in energy prices alone does not appear to represent a renewed surge in inflationary pressure. What will need to be absorbed by U.S. households is higher energy bills as heating season ramps up and new energy supplier prices kick in after a long period of exceptionally low prices. “Sticker shock” versus last year’s energy bills will be an apt description of many households’ reaction to what likely will be double-digit increases on energy not used, and thus prices not seen, for most of this year.

Saving appears to continue to be a backburner issue for households, despite increasing talk of a looming recession in 2023 – including PNC’s own most-likely forecast scenario now including a three-quarter recession next year. The savings rate among households fell to 2.3%, which rivals the dismal pace of saving in the lead-up to the 2008 financial crisis and resulting Great Recession through 2009. Part of the low pace of savings, as a share of after-tax (disposable) income, is that inflation continues to outpace wage growth, and especially regarding necessity items like food, housing and energy costs. But the consumer spending numbers for October 2022 included in this month’s release show that households also seem to refuse to give up their spending habits in the face of gathering economic storm clouds. The Federal Reserve will continue to raise rates – though potentially at a slower pace than their recent 75 basis-point hikes – as long as inflation remains above their 2% average target. Job growth may be slowing, but nonetheless remains positive and a source of fuel for consumption. This reality will provide the Fed with cover to raise rates.

But with inflation continuing to push up prices well above a healthy pace into mid-2023, and built-up pandemic era savings being depleted and not replenished with savings out of current income, U.S. consumption could hit a wall by the middle of next year. This reasoning helps explain how a recession looms even while consumers appear undeterred by rising costs and higher interest rates.