Saturday, November 1, 2008

Consumer Spending Plummets & Sets the Stage for a Weak Q4

Consumer Spending Plummets & Sets the Stage for a Weak Q4

Personal income rose 0.2 percent in September and spending fell 0.3 percent. The September number is a bit of a lame duck, as nearly all of the information was included in yesterday’s GDP figures. The report, however, does shed light on where the current quarter begins and gives us an idea of how weak the fourth quarter will be.

Wages & Salaries Are Cleaner Than The Income Data

Personal income rose 0.2 percent in September and that increase was actually held back by the effects of Hurricane Ike, which struck the Gulf region that month. The hurricane directly reduced rental income and proprietors’ income but lifted transfer receipts. There was also a loss of wages and salaries due to disruptions in economic activity in Houston and southern Texas. Wages and salaries increased just 0.1 percent during the month, with declines in manufacturing and construction being offset by gains in services and government.

The personal income data continue to be distorted by the tax rebates, which were paid earlier this year. The rebates boosted income growth during the spring and make the most recent data look deceivingly weak. The wage and salary data were not distorted by the rebates and provide a clearer view of consumer finances. Wage and salary growth has clearly slowed in recent months and is now up just 3.8 percent over the past year. The trend is still far more favorable than during the last recession, as job losses have not been anywhere near as large as they were back then.

The bottom could still fall out of wage and salary growth. Layoff announcements have picked up considerably since the credit markets began to melt down in late September and little of those data are included in this month’s figures.

After adjusting for inflation, consumer spending tumbled 0.4 percent in September, marking the third drop in the past four months. Most of the weakness was in durable goods, where spending slumped at a 14.1 percent annual rate. Much of that weakness was in motor vehicles, where credit availability was severely constrained last month. Spending for nondurables also tumbled, falling at a 6.1 percent pace. Services outlays, which rarely drop, rose at a very modest 0.6 percent pace.

The weakness in real consumer spending means the fourth quarter began in a very weak position. Spending ended the quarter at a 1.1 percentage point annualized rate, below the third quarter average, all but assuring another quarterly drop. October was likely another difficult month and forecasts for the holiday shopping season are exceptionally cautious. The weather may help the figures, as colder weather boosted demand for utilities and warmer clothing. Our current expectation is that consumer spending will decline at around a 2 percent annual rate during the fourth quarter, with declines in autos and other big ticket items leading the way.

With consumers pulling back, the saving rate has inched up, rising to 1.3 percent in September. We expect further gains, as consumers try to cope with the dramatic loss of wealth from falling home and equity prices.

Consumer Spending Plummets & Sets the Stage for a Weak Q4

Consumer Spending Plummets & Sets the Stage for a Weak Q4

Consumer Spending Plummets & Sets the Stage for a Weak Q4

Wachovia Corporation

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