November 30, 2017 – Consumer spending, measured by Personal Consumption Expenditures (PCE), makes up approximately two-thirds of the economy and is a direct measure of purchasing activity. We see where consumers are spending their dollars, whether it be durable and nondurable goods, or on services. Changes in the personal income level dictate consumer spending.
Personal income rose 0.4% in October, above the consensus of a 0.3% increase. Consumer spending increased 0.3% for the month, down from the previous month’s revised 0.9% increase. Wages and salaries experienced a 0.3% gain in October. The PCE index stayed in line with expectations, with a 0.1% increase in PCE and a 0.2% increase in core PCE (excluding food and energy). PCE is up 1.6% year-over-year and core PCE is up 1.4% over the last year.
The slight increase in personal income reflects the increase in personal consumption expenditures. The more money consumers have to spend, the more likely they are willing to spend it and push money through the economy. October’s real PCE is comprised of an increase of $13.1 billion. Of that $13.1 billion, $11.4 billion was spent on goods while $2.7 billion was spent on services. When consumers push their excess money through the economy, economic growth will continue to rise and bring inflation along with it. As inflation increases and heats up the economy, we will see the Fed increase rates to try and control inflation to its target rate.