Falling income dampens consumer spending

Pressured by a drop in government transfer payments, personal income fell 0.1% in September, the first decline in over a year.  Falling income encouraged consumers to pullback on spending, which rose by just 0.2%.  Meanwhile, the savings rate fell from 5.6% in August to 5.3% in September.

Consumer spending makes up about 70% of total economic activity, and September’s small increase highlights what’s hampering a more vigorous recovery.

Moreover, the drop in income was not just limited to declining transfer payments from the government, wages were practically unchanged following modest increases in both July and August.  Without faster job creation, future income gains are likely to be muted.  And with consumers focused on building savings, increases in spending will probably be modest at best.

Elsewhere, the disinflationary trend resumed, with the core PCE Price Index holding steady.  Year-over-year, prices increased 1.2%, versus 1.3% in August.  The Fed has already deemed that inflation is too low, and September’s drop in the y/y rate is likely to reinforce an expected decision on Wednesday to embark on the next round of quantitative easing.