There are a few important reports on the U.S. economy worth mentioning this morning. First, personal income for Americans rose by 0.4 percent in August, according to the U.S. Department of Commerce. That was in line with estimates and the 42nd monthly increase in a row. Consumer spending, which accounts for the bulk of the U.S. economy (GDP), lifted by 0.1 percent last month. That was slightly below forecasts and the July gain was revised lower. Overall, though, consumption has been solid recently and bodes well for third quarter gross domestic product growth. This could make continued, aggressive monetary policy easing harder for the Federal Reserve to justify, especially with the core PCE deflator, the FOMC’s preferred measure of household price changes, ticking higher once again in August. However, officials also appear willing to allow inflation to run above their 2 percent “target” until the potential headwinds from slower overseas growth and an unresolved trade war abate.
Going forward, the sustainability of U.S. consumption growth will continue to depend in large part on the labor market and consumer confidence. The former remains about as strong as one could hope for at this stage in the economic cycle, while the latter has deteriorated a bit recently. For example, the University of Michigan’s consumer sentiment index rose in September, but only slightly from the nearly 3-year low hit in August. The Conference Board’s gauge of consumer confidence similarly fell this month by the most since December 2018, although weakness was concentrated among higher income Americans and instead improved for lower income consumers. This divergence could mean that the latest decline in headline optimism has more to do with the trade war, particularly its effect on stock market volatility, than the underlying strength of the economy. Further, although confidence measures have pulled back recently they remain at historically strong levels consistent with continued spending growth. Pessimism, though, can be contagious so subsequent sentiment reports will be more telling. The Conference Board’s Lynn Franco added that “The escalation in trade and tariff tensions in late August appears to have rattled consumers. However, this pattern of uncertainty and volatility has persisted for much of the year and it appears confidence is plateauing. While confidence could continue hovering around current levels for months to come, at some point this continued uncertainty will begin to diminish consumers' confidence in the expansion.”
Sources: Econoday, U.S. DoC, UoM, Bloomberg, The Conference Board