They Out-Spent and Out-Earned inflation without breaking a sweat, and saved some too.
By Wolf Richter for WOLF STREET.
I had too many irons in the fire yesterday, and didn’t think I needed to cover the consumer spending data released by the Bureau of Economic Analysis, because, adjusted for inflation, it was about like it was before: Our Drunken Sailors, as we’ve lovingly and facetiously called them all year, are making record amounts of money, with incomes beating inflation nicely all year. And they did it again. And they went out there spending it, and they still had money left over that they saved. Kudos.
But that’s not what the headlines made you think. The WSJ hilariously said in its headline, “Consumers Pulled Back on Spending,” and Bloomberg’s headline ridiculously said, “Americans Are Finally Turning Frugal After Splurging over Summer.” I mean, Americans frugal? Come on! So now, I gotta wade into it to straighten this mess out.
Consumer spending, adjusted for inflation, rose by 0.2% in October from September, outspending inflation at a good clip. Year-over-year, adjusted for inflation, spending rose by 2.2%, near the top of the growth range over the past 15 months. The three-month moving average, which irons out the month-to-month ups and downs and shows the trends better, also rose by 0.2% for the month and by 2.2% year-over-year, near the top of the range for the past 18 months! Note the flat spots late last year and in the spring this year. Those were the slowdowns. Not now.
Spending on services, adjusted for inflation, rose by 0.2% for the month and by 2.3% year-over-year, the fastest growth rate since March.
The three-month moving average rose 0.2% for the month and 2.2% year-over-year.
Of the total amount of consumer spending, 65% goes to services. The remaining 35% are spread among durable goods (cars, computers, furniture, appliances, etc.) and non-durable goods (food, gasoline, clothing, shoes, supplies, etc.).
Inflation has moved from goods to services. The core PCE price index for services rose by 4.6% year-over-year, according to the BEA yesterday. And consumers are outspending this inflation without breaking a sweat.
You can see in the chart that in the spring, spending on services, adjusted for inflation, grew at a slower rate, or barely grew, but then re-accelerated over the past four months, amid the huge travel boom.
Spending on nondurable goods, adjusted for inflation, jumped by 0.3% in October from September, the fastest rate in four months; and it rose by 1.3% year-over-year.
The three-month moving average ticked up by 0.1% for the month and by 1.1% year-over-year.
Nondurable goods include food, beverages, fuel, clothing, shoes, supplies, etc. You can see the pandemic frenzy through 2020, followed by the slowdown, when people started using their bales of toilet paper and other stuff stacked in the garage because they couldn’t sell it on eBay? But in recent months, spending on nondurable goods has accelerated again:
Spending on durable goods, adjusted for inflation, dipped 0.3% for the month, but was up by 3.7% year-over-year.
The three-month moving average rose by 0.2% for the month and by 4.2% year-over-year.
This continued growth of spending on durable goods, after the huge spike during the pandemic, has flummoxed a lot of observers; they expected Americans, with their homes stuffed to the rafters with this stuff, to cut back and shift spending to services. For a few months after the stimulus frenzy in 2021, there was some of that. Then spending on durable goods took off again.
Where does all this money come from? Record incomes.
Personal income from all sources, adjusted for inflation, but without transfer payments from the government – so this is income from wages, interest, dividends, rental properties, farm income, small-business income, etc., but without Social Security benefits, unemployment insurance, VA benefits, etc. – jumped by 0.3% for the month by 2.3% year-over-year (adjusted for inflation).
This means that consumers have out-earned inflation by a fairly wide margin, and that’s where this spending growth comes from.
This income growth is a function of rising employment, rising wages and salaries, rising interest incomes, rising rental incomes, etc.
Per-capita disposable income, adjusted for inflation (total income minus taxes), jumped by 0.3% for the month, the biggest increase since May; and by 3.9% year-over-year.
This is what consumers had left to spend on goods and services and to save. And it has been outrunning inflation by a wide margin all year, after a steep setback due to inflation in 2022.
This chart shows the closeup of per-capita disposable income, adjusted for inflation, as percent change from a year ago.
In other words, per-capita disposable income has been outrunning inflation by 3 to 5 percentage points all year. This is where the money came from to do all this spending:
I took the data back only to June 2022 to cut out the huge distortive effects of the stimulus payments, and the year-over-year comparisons to those stimulus payments a year later.
The personal saving rate ticked up to 3.8%. That’s the portion of disposable income that consumers didn’t spend but put aside in various ways, from contributions to their 401ks to having a little extra in their checking accounts. That rate was somewhat lower than in the years after the Financial Crisis, but higher than in the years before the Financial Crisis. It’s amazing that our Drunken Sailors are spending so much but are still able to save. And there is no reason for them to slow down unless they lose their jobs.
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