US Consumer spending and income growth decelerate modestly in September, while inflationary backdrop remains benign

Personal income rose 0.1% m/m in September, slightly below market expectations for a 0.2% m/m gain. After removing inflation and taxes, real disposable personal income rose by a slightly better 0.2% on the month.

Personal consumption rose by 0.1% m/m in nominal terms, also coming in a touch below the consensus forecast of 0.2%. In real terms, spending was up 0.2% m/m -decelerating from the 0.4% m/m August reading

By component, real spending on durable goods led the way, rising by 0.6% m/m. Spending on services rose by 0.3%, while spending on non-durable goods fell 0.3% m/m. The personal savings rate edged up to 4.8% from 4.7% in August.

Price growth as measured by the headline PCE index dipped by 0.1% on the month, while the year-over-year measure slipped to 0.2%. Core PCE prices (excludes food & energy) rose by 0.1% m/m (slightly below the consensus of 0.2% m/m) , but remained flat at 1.3% year-over-year. 

Low energy prices and modest gains in employee compensation continue to deliver sizeable gains in consumer purchasing power - with real disposable income having increased by 3.5% (annualized) in the third quarter. This has translated into a robust pace of consumer spending over the last several quarters, which is expected to be maintained through the rest of this year and into 2016.

"Continued strength in consumer spending is also rooted in the fact that we are likely to see ongoing progress in the labor market. Indeed, the pace of job creation has slowed in recent months, but a +200k/monthly pace is an unrealistic expectation given where we are in the recovery. In fact, job growth of just 130k-150k is a sufficient range to eat up remaining labor market slack. Moreover, further evidence of eroding labor market slack also appears to be manifesting on the wage front, with today's Q3 reading of the Employment Cost Index (ECI) rising by a robust 0.6% q/q", says TD Economics.

That being said, the other half of the Fed's dual mandate appears to be the real restraining factor holding the FOMC back. At just 1.3% y/y, the core PCE inflation continues to point to a benign inflationary backdrop. To a large extent, the weakness in inflation is stemming from the continued pass through from lower energy prices and a higher dollar. However, as the downward pressures from these transitory factors fade over the coming months, we should start to see core PCE turn higher.

"This will be a key factor in determining when the Fed will make the first move in taking interest rates off the floor. At a minimum, Fed officials will need to be convinced that inflation has formed a floor and that the directional pull is upwards based on the strength emanating from consumer spending and the continued progress in the job market. As we move closer to the Fed's December meeting, be extra scrutiny will placed on both the employment and inflation reports", added TD Economics.