Consumers Continue to Drain Saving

Disposable incomes rose 0.7% after adjusting for inflation in September, only partially reversing several months of declines following the surge in the wake of stimulus checks last April. Data for the previous two months of income were revised up slightly.

Gains in wages and salaries offset a sharp decline in supplements via executive order. The administration had diverted funds from FEMA to temporarily provide a good portion of households with $300 per week, after the CARES Act’s $600 per week supplement to unemployment insurance lapsed. The $300 payments were made retroactive to August and have since been depleted.

Personal consumption expenditures jumped at a more rapid 1.2% pace after adjusting for inflation. The data for July and August were not revised. The saving rate, which surged above 30% during lockdowns last spring, slipped to 14.3% in September from 14.8% in August. That higher-than-usual saving should provide a tailwind for spending when the economy can more fully reopen. The problem is the composition of the saving. Much of the saving from stimulus payments and supplements to unemployment insurance in the CARES Act has been spent, which has left low-wage households running on fumes. High-wage households are doing much better.

Spending on big-ticket durable goods and clothing overshadowed spending on services, which decelerated sharply in September. Higher income households spent money to remodel their homes, buy luxury vehicles and purchase exercise equipment to make working from home more comfortable.

The slowdown in spending on services, which includes spending on health care, is unique to this recession. Hospitals overwhelmed by COVID patients are unable to do elective surgeries. Fewer people are showing up in emergency rooms for fear of contagion. Look for spending on travel and holiday celebrations to be especially weak this holiday season.

The airlines are already seeing a pullback in reservations in response to the recent surge in hospitalizations. Layoff announcements in the airline industry picked up in September when federal aid for the industry ran out. It will be hard to get the service sector going again, which is key to bringing back the millions still laid off in response to the crisis.

Cooler temperatures are another hurdle for spending on discretionary services going forward. Outdoor dining has already closed in states where temperatures have fallen below 50 degrees, while curbs on indoor dining and bars have increased. Many cities are limiting indoor activities with curfews instead of lockdowns.

Separately, the personal consumption and expenditures (PCE) index and core (excluding food and energy) both edged up 0.2% in September. That pushed overall and core inflation measures slightly higher to 1.4% and 1.5% on a year basis respectively. A pickup in energy prices was only partially offset by a monthly drop in food prices.

Food prices, which impact the ability of households to feed their families, are still up 8% from a year ago. That is down from a double-digit rate earlier in the year but means little to households that have now lost all supplements to unemployment insurance. More than one in 10 adults could not feed themselves for a week in September, a record high.

Bottom Line
The good news in spending in September was mostly limited to goods spending, which is lowering the impact on service job gains. October could show additional increases, but prospects for November and December are dimming.

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