Consumer Spending Gains Confirm Strong GDP Report

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Last week’s unexpected 3.0% gain in gross domestic product (GDP) gave some serious support to the notion that the U.S. economy can keep growing at or above 3.0%. That report was strong even considering the negative impact of two hurricanes, and it is still widely expected by economists that there will be a snapback of lost business activity from the third quarter that carries over into the fourth quarter of 2017. What economists know is that for U.S. GDP to be strong it almost cannot occur with gains in consumer spending — close to 70% of U.S. GDP is tied to how much consumers are spending.

The U.S. Department of Commerce has released its September report for consumer spending, and it showed a seasonally adjusted 1.0% gain from the prior month. This was the largest monthly gain in over eight years, and it was stronger than the Wall Street Journal and Reuters consensus estimates of 0.8%.

We had already seen a strong report on durable goods spending for the month, and the stronger GDP report should have set the stage for a higher report on spending. Still, the report was higher than expectations.

Personal income also posted a 0.4% gain from the prior month. That report merely met expectations. Some of the gains in spending have come at the expense of savings. The personal savings rate dropped to 3.1% from 3.6% in August.

A few more tidbits should put some of the September gains in context:

  • Personal income increased $66.9 billion in September.
  • Disposable personal income (DPI) increased $53.0 billion.
  • Personal consumption expenditures (PCE) increased $136.0 billion.
  • Real DPI decreased less than 0.1% in September and Real PCE increased 0.65.
  • The PCE price index increased 0.4%, and the reading excluding food and energy was up just 0.1%.

The Bureau of Economic Analysis (BEA) report also noted the largest parts of the gains were autos in goods and household utilities in services. The report said:

The $76.0 billion increase in real PCE in September reflected an increase of $59.1 billion in spending for goods and a $21.6 billion increase in spending for services. Within goods, new motor vehicles was the leading contributor to the increase. Within services, the largest contributor to the increase was spending for household utilities.

Investors, economists, workers and business owners will want to consider that the BEA does note that hurricanes Harvey and Irma had an impact, but the level was not quantified. The BEA report said:

The August and September estimates of personal income and outlays reflect the effects of Hurricanes Harvey and Irma. BEA cannot separately quantify the total impact of the storms on personal income and outlays because most of the source data used to estimate the components of personal income and outlays do not separately identify storm impacts. BEA made adjustments to estimates where source data were not yet available or did not fully reflect the effects of the storms.