The Boock Report

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Savings rate down to 10 yr low…

United States

The PCE inflation figures for September were all right in line with expectations. The headline gain was .4% m/o/m and 1.6% y/o/y. The core rate was higher by .1% m/o/m and 1.3% y/o/y. To highlight, there remains a 4 tenths difference between core CPI and core PCE because of the latter’s reliance on healthcare costs which are suppressed by government imposed prices for Medicare and Medicaid and a lower component of housing compared to CPI. The rise in energy price in particular contributed to the jump in m/o/m inflation. Services inflation rose 2.1% y/o/y and remains persistently above 2% while goods prices accelerated by .6% y/o/y, the most since March. Supply constraints have become evident since the hurricanes and the rise in commodity prices is also apparent with the CRB index at a 6 ½ month high.

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Mostly included in Friday’s GDP report and thus not market moving was the Income and Spending data. I pointed out on Friday that a large contribution to the number was a sharp decline in the savings rate which in turn boosted consumer spending. With the savings rate down to a 10 yr low, there is very little ammunition left here for a boost in consumer spending unless its debt driven and/or wage driven. The savings rate in September fell a sharp 5 tenths to 3.1%, the lowest since December 2007. It’s averaged 5.2% over the past 25 years.

PERSONAL SAVINGS RATE

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Most positively on the income side though was a 3.4% y/o/y gain in private sector wage growth, the quickest since March. Nominal spending was up by 1% and was goosed by a jump in durable goods, most likely influenced by the sharp rise in auto sales post Harvey. Spending on services also picked up as well as nondurable goods spending (likely helped by higher gasoline prices).

Bottom line, let’s hope that wage growth accelerates from here because the decline in the savings rate is disconcerting. As stated, it contributed a lot to personal spending in Q3 but that is not sustainable. As for inflation, I’ve said it before and will say it again, the PCE is a flawed number that understates inflation and the Fed’s focus on it instead of CPI has resulted in much easier policy for much longer.