Lapse in Benefits Saps Incomes

Disposable incomes plummeted 1.6% after adjusting for inflation in September, after contracting 0.2% in August. The end of expansions and supplements to millions on unemployment insurance and higher inflation took a big toll on incomes in September, especially those at the lower end of the income strata. Incomes for August and July were revised up slightly but not enough to offset the cliff in September.

Consumer spending held up better, posting a 0.3% inflation-adjusted gain during the month after rising 0.6% last month. Increased spending on nondurable goods - food, restaurants and clothing - and services more than offset a small drop in spending on big-ticket items. Price hikes and a shortage of vehicles have taken a larger toll on vehicle sales during the quarter.

Consumers have amassed more than $2.4 trillion in excess saving; a good portion of that saving was drained in September when income support lapsed. The saving rate dropped to 7.5%, the lowest of the pandemic and close to the levels we saw pre-pandemic in February of 2020. Much of the excess savings that low-income households were able to save from earlier stimulus will be drained by year-end. The good news is that employment gains are expected to pick up now that the Delta wave of COVID has abated.

Credit card usage suggests that consumers opened their wallets and dipped even further into their savings in October. Halloween is the second largest spending holiday for retailers and if my neighborhood is any indication, there is a lot of pent-up demand to celebrate the festivities this year. This will add to gains that high-end retailers and resorts enjoy as the borders are opened to vaccinated foreign tourists and workers in November.

The personal consumption expenditure (PCE) index rose 0.3% during the month, which brings year-on-year measures of the PCE to 4.4%. That is the highest level of PCE inflation since January 1991. A pickup in food and energy costs accounted for much of that increase. The core PCE (ex food and energy) index edged up 0.2%, a slight deceleration from August but year-on-year measures held at 3.6%. That marks four months in a row of core inflation at the highest level since May 1991.

Separately, the employment cost index surged 1.3% in the third quarter. Wages and salaries jumped 1.5% and benefits moved up 0.9%. That is the fastest quarterly pace for compensation in more than 20 years. The last time we came close was in the first quarter of 2001. At that time, compensation costs were decelerating instead of accelerating. Wages and salaries alone jumped at the fastest quarterly pace since early 1984.

Compensation costs for civilian workers increased 3.7% from a year ago, the fastest pace since 2004. The jump was the greatest in the leisure and hospitality sector, with compensation surging nearly 7% from a year ago.

Compensation in the private sector passed the 4% level from a year ago, almost double the compensation in the public sector. That helps explain the struggle school districts are having luring back workers. They are not meeting the competition, especially in high contact and greater risk of contagion areas of the economy.

The surge in compensation exceeded even the most aggressive of recent productivity gains. That helps explain the complaints of margin compression we are hearing as earnings come out for the third quarter.

Bottom Line
Consumers drained their savings to keep spending going. We will need to see a pickup in employment gains to make up for the loss in income support; that looks like it is occurring. Wages and benefits continued to accelerate, which is good news for workers but bad news for producers who are now feeling the squeeze on profit margins.

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