U.S. personal incomes declined in September and spending rose, suggesting that American consumers have started tapping into the savings stockpile they built up during the pandemic, says BMO Capital Markets.
In a new report, BMO noted that U.S. personal spending rose by 0.6% in September, with about half the increase attributed to inflation and half to a rise in real spending.
The increase in spending came despite the fact that “personal income hit a giant pothole in September,” BMO said, with income dropping 1.0%. The drop reflected the end of federal emergency unemployment benefits in remaining states.
The report noted that the increase in spending, coupled with a decline in income, “pulled the saving rate all the way down to 7.5% from 9.2%.”
With the U.S. saving rate dropping below its pre-pandemic level, BMO said, “households are now starting to dip (a toe) into a massive cache of savings, estimated at over US$2.2 trillion or 9% of GDP.”
While that large savings cache should provide “plenty of fuel to drive spending in the quarters ahead,” BMO also noted that “rising prices are eating into spending power.”
September’s price increases pushed the annual headline inflation rate to a 30-year high, it noted.
“Given growing pressure on wages, this may not be the peak for core inflation,” BMO said. “The employment cost index soared 1.3% in Q3 (not annualized), hoisting the yearly rate to a 17-year peak of 3.7%. And it doesn’t look like the gain was backed by higher productivity in the quarter.”
Looking ahead, the report said that U.S. consumer spending and GDP “are poised to rebound nicely in Q4 as the Delta wave recedes and employment and wages move higher, though product shortages and rising prices will continue to hold back demand.”