Hours: Monday - Friday 8:00 am - 5:00 pm


Spending stayed robust in September as inflation steadied

REAL ECONOMY BLOG | October 27, 2023

Authored by RSM US LLP

The U.S. economy maintained its momentum in September with personal spending that was stronger than forecasted. But even with the booming consumer demand, inflation ticked up only slightly, driven largely by energy and travel service prices.

Friday’s income and spending data adds more reason to expect a soft landing instead of a recession.

Spending rose by 0.7% on the month, while the personal consumption expenditures index—the Federal Reserve’s key inflation metric—increased by 0.4%, the same as August. After adjusting for inflation, spending rose by a healthy 0.4%, according to data released by the Bureau of Economic Analysis on Friday. Core inflation rose by 0.3% from a month ago.

The data suggested an economy that has been running strong but not hot—more reason to expect a soft landing instead of a recession as the economy cools down. The final quarter of the year, though, will face more challenges than the previous one.

Personal spending

American consumers have proven to be far more resilient than expected, bolstered by $400 billion to $1.3 trillion in excess savings in our estimate.

With consumers not being afraid of reaching into their savings to keep spending, the risk of a pullback in the fourth quarter should be insignificant. The savings rate in September was 3.4%, sharply lower than the 4.0% rate in August and 5.3% in May.

We expect spending growth to be much slower in the last three months of the year compared to the third quarter, yet solid enough to keep consumption afloat.

The Federal Reserve, taking this week’s data together with its outlook for the fourth quarter, should stay firm on its interest rate path and hold rates steady for the rest of the year.

That should be restrictive enough to keep inflation from running hotter than desired while providing some much-needed certainty to the financial system, which has recently had increasing volatility.

Underlying inflation has been falling in line with the Fed’s 2% target. Core inflation, which excludes the more volatile categories of food and energy, was running at 2.4% on a three-month moving annualized pace, not far from the Fed’s target.

We should expect more relief as shelter prices tick down further following the frothy housing market of the past year.

Another reason to expect the Fed to hold rates steady is that even though job gains remain robust, total personal income after adjusting for inflation and taxes has been declining for four straight months.

Real disposable income fell by 0.1% in September, reflecting slower wage growth and fewer hours worked. If our prediction that the labor market will continue to cool down in the final quarter turns out to be true, we should see income to be less of a factor in bolstering spending.

Personal income

The takeaway

Friday’s data on spending and income, together with recent data on gross domestic product, has pointed to a booming economy that should rebut any speculation for an imminent recession.

The next quarter, however, will be a pivotal one that should provide more clarity for whether we will be able to skirt a hard landing or not, given the many headwinds in the economy. We remain comfortable with our call for a soft landing as the base case, with a nontrivial 40% risk of a recession going into the holiday season.

Let's Talk!

Call us at (325) 677-6251 or fill out the form below and we'll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

This article was written by Tuan Nguyen and originally appeared on 2023-10-27.
2022 RSM US LLP. All rights reserved.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Condley and Company, LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.

For more information on how Condley and Company can assist you, please call (325) 677-6251.

Share This