October PCE and durable goods reports bring US Q4 GDP tracking to 2.0%

Personal income rose 0.4% m/m in October, one-tenth below expectation but in line with consensus estimates, driven by a solid 0.6% rise in wage and salary income. Compensation continues to grow at a solid pace, rising 4.7% y/y through October, reflecting ongoing gains in employment. Personal income for September was also revised higher to 0.2% m/m versus 0.1% as initially reported. Economists viewed the softening in household income last month as reflecting the decline in the average workweek and we expected income data to bounce back in October. However, personal spending did not keep pace with the rise in income. Personal spending rose a tepid 0.1% m/m in nominal terms, two-tenths below our and consensus expectations, and 0.1% in real terms after adjusting for inflation. Given the slow rate of personal spending, the saving rate ticked higher to 5.6% in October, the highest reading since 2012. The October report on personal income and spending includes revisions to the Q3 data released yesterday, which included a downward revision to consumption and upward revisions to income. Altogether this led to a substantial upward revision to the saving rate since mid-year.

The rise in the saving rate is likely to rekindle concerns that households have a greater propensity to save and, as a result, lead some to question the durability of domestic demand in the face of an expected Fed tightening cycle.

"We view that the rise in the saving rate is unlikely to persist and, over time, the solid growth in personal income is likely to keep growth in personal consumption expenditures elevated at this point of the cycle. Thus, while households are displaying a level of caution, perhaps in response to a combination of lingering concerns about global growth and rising geopolitical risk, the bulk of the data continue to support our view that the trajectory of economic activity will remain above the growth rate of potential output in coming quarters",says Barclays.

The inflation side of this morning's report was softer than consensus expectations with headline PCE rising 0.1% m/m and core PCE flat (0.046% rounded to three decimals) on the month. This leaves headline and core PCE inflation up 0.2% y/y and 1.3% y/y, respectively. Both readings were one-tenth lower than our expectation. The details of the report are consistent with our revised inflation forecast (see Inflation: Lying low for longer) that assumes further dollar pass-through to core goods than before. In addition, we see the ongoing and sharp declines in Chinese producer prices as also putting downward pressure on goods prices.

In the October PCE report, goods prices were down 3.1% y/y with both durables (-2.0% y/y) and nondurables (-3.7% y/y) showing weakness. Services inflation at 1.9% y/y was steady relative to prior months, but insufficient to offset further weakness in core goods. Although economists see this report as causing concerns among some FOMC participants about the outlook for inflation, it is believed the bulk of the committee continues to expect that further improvement in labor markets will support a return of inflation to the Fed's target once transitory shocks from the exchange rate and energy prices fade. As such, a solid November employment report should be sufficient to keep expectations of a December liftoff in place.

 Total orders for durable goods rose 3.0% m/m in October, a bit above our (2.5%) and consensus expectations (1.7%), as the widely anticipated surge in nondefense aircraft orders was further boosted by unexpected strength in core orders. Orders for nondefense aircraft orders rose 81% m/m to reverse three consecutive monthly declines.

Elsewhere in the report, several categories of core manufacturing saw better demand in October including machinery (1.6% m/m, previous: -0.3%), computers and electronics (1.8% m/m, previous: -0.3%) and primary metals (0.4% m/m, previous: -2.5%). Orders for motor vehicles and parts slumped 2.9% m/m (previous: +1.0%). Stripping out those categories that cause undue volatility, core capital goods orders rose 1.3% m/m in October (previous: 0.4%). This was well above our and consensus expectations of a two-tenths increase. Core shipments, however, were weaker than expected (-0.4% m/m; previous: +0.7%). The combination of the large upward revision to Q3 equipment investment in yesterday's GDP release and this morning's weaker shipments data lowered our estimate of Q4 equipment investment. Elsewhere in the report, manufacturers' inventories of durable goods declined 0.2% m/m in October and were revised down in September to -0.6% m/m.  

"Weaker-than-expected real personal spending growth in October suggests less growth in PCE for Q4 as a whole. This morning's release also contained the revised monthly profile that corresponds to yesterday's second estimate of Q3 GDP; those revisions show less momentum for PCE heading into Q4. Taken together, our tracking estimate of Q4 real PCE growth fell to 2.5%, lowering our Q4 GDP tracking estimate one-tenth to 2.2%. The durable goods report revised up core capital goods shipments in September while revising lower manufacturers' inventories of durable goods. The revisions trimmed our Q3 GDP tracking estimate one-tenth to 2.0%. In October, core capital goods shipments fell more than expected. The data lowered our estimate of equipment investment for Q4. On net and after rounding, our Q4 GDP tracking estimate fell two-tenths to 2.0%", added Barclays.