Personal Income And Spending Even Out In August

Personal income and consumer spending corrected in August what were uneven readings in July, with income up 0.4 percent versus only a 0.1 percent July gain and with spending up only 0.1 percent in August following July's revised 0.5 percent rise. Yet the marginal August gain for consumer spending wasn't expected and, despite July's strength, will mark down third-quarter GDP estimates.

Inflation readings, and their implications for Federal Reserve policy, are curiously mixed. The monthly reading for the PCE core is unexpectedly low at only 0.1 percent yet the year-on-year reading, up 1 tenth from an upwardly revised July to 1.8 percent in August, shows as-expected progress toward the central bank's 2 percent goal.

The trouble for consumer spending comes from services, which are a difficult subcomponent for forecasters to track given the scarcity of related leading indicators. Service spending was unchanged and follows only 0.1 percent increases in the prior two months. Flatness for services was accompanied by only a 0.1 percent August rise in nondurable spending to offset what is a very promising 0.9 percent gain in durable spending that follows a 0.8 percent rise in July and which both speak to strong discretionary demand from the consumer, itself the result of labor market strength.

A 0.6 percent rise in wages & salaries is a major plus in today's report that supported the overall gain for income. Proprietors' income was also strong as were personal current transfer receipts and dividend income. These offset modest growth for rents and sharp contraction for personal interest income that reflects ongoing Fed rate cuts.

This report has a little bit of everything and will feed lively cross debate among the doves and the hawks at the Fed. Inflation is improving but it's not quite there while consumer spending is soft overall but shows signs of underlying force.