Consumers grow more pessimistic ahead of the​ holiday season

PCE inflation comes in same as August

The picture painted of spending and inflation by the personal consumption expenditures index was largely unchanged from the month before, according to data released on Friday by the US Bureau of Economic Analysis.

Consumer spending rose 0.6% in September over the prior month, equal to the jump in August. An increase in spending on services such as international air travel and housing far outpaced goods, as the BEA reported a $94.7 billion increase in spending for services, while goods spending increased $18.3.

The PCE price index saw the same increases as August, too. It was 6.2% year-over-year, and 0.3% on a monthly basis. Excluding the more volatile food and energy price, the inflation measure was 5.1% annually and 0.5% on a monthly basis.

Prices for goods increased 8.1% year-over-year, while food prices were up 11.9%.

Income also grew 0.4%, just like August, while disposable income increased 0.4% as we head into the holiday season.

This report is a focal point of economists at the Federal Reserve, who meet next week to determine whether to raise interest rates once again. While it paints a picture that is the same as the month prior, it does so in a period when inflation continues to be elevated and demand isn’t cooling. Those are not the desired outcomes for the significant interest rate increase the Fed has levied in recent months, leaving the possibility of another rate hike on the table.

GDP: US economy gets back to growth

After two straight quarters of contraction, the US economy showed signs of growth once again in the third quarter. Gross domestic product (GDP) increased 2.6% from July-Sept., according to the BEA.

Consumer spending was among the most prominent drivers, with an increase in services such as healthcare. However, that was offset by a decrease in auto purchases and food prices, indicating that spending on goods continued to fall for the third straight quarter. The drop in goods spending slowed, falling 1.2% as opposed to a 2.6% drop in the second quarter. There was also a decrease in the import of consumer goods.

The price index increased 4.2% over the second quarter, compared with a 7.3% increase in the second quarter.

Consumer mood enters 'dismal' territory

In monthly surveys that plum the psyche of consumers released this week, there are signs of some pessimism setting in.

The Consumer Confidence Index fell in October after posting back-to-back gains in August and September, according to the Conference Board. In particular, the outlook on current business and labor market conditions fell sharply, remaining in “dismal” territory, while the forward-looking expectations also declined.

This was an indicator that economic growth slowed to start the fourth quarter, said Lynn Franco, Senior Director of Economic Indicators at The Conference Board, in commentary released with the data.

There were some signs that the mood around inflation began to lift, but that is dissipating heading into the holiday season.

“Notably, concerns about inflation—which had been receding since July—picked up again, with both gas and food prices serving as main drivers,” Franco wrote. “Vacation intentions cooled; however, intentions to purchase homes, automobiles, and big-ticket appliances all rose. Looking ahead, inflationary pressures will continue to pose strong headwinds to consumer confidence and spending, which could result in a challenging holiday season for retailers. And, given inventories are already in place, if demand falls short, it may result in steep discounting which would reduce retailers’ profit margins.”

Likewise, the University of Michigan’s index of consumer sentiment rose just slightly from September, and remains near all-time lows. Given this, UMich Survey of Consumers Director Joanne Hsu noted that the slowdown in consumer spending noted in the GDP report wasn’t a surprise.

In one bright spot, buying conditions for durable goods rose 23%. But the expectations for the year ahead fell sharply by 19% to offset it.

“These divergent patterns reflect substantial uncertainty over inflation, policy responses, and developments worldwide, and consumer views are consistent with a recession ahead in the economy,” Hsu said.

Alongside continuing high inflation, there are signs that this year’s downturn in the stock market and the way that rising interest rates are affecting the housing market are beginning to take their toll as well.

“Given consumers' ongoing unease over the economy, most notably this month among higher-income consumers, any continued weakening in incomes or wealth could lead to further pullbacks in spending that would reinforce other risks of recession,” Hsu wrote. “…Uncertainty over inflation expectations remains elevated, indicating that inflation expectations are likely to remain unstable in the months ahead.”

New home sales fall 11%

Here are details on three more key indicators released this week:

Durable goods orders, which are orders placed with manufacturers for goods that last three years or more, increased 0.4% to $274.7 billion in September, the US Commerce Department reported. These orders were up for six of the last seven months. Excluding defense, new orders increased 1.4%. Transportation equipment drove the increase.

Retail inventories increased 0.4% on a monthly basis in September, and 2.2% year-over-year. This came as many retailers continue to work through a glut of inventory caused by supply chain disruptions. In September, Nike became the latest prominent retailer to detail how it received multiple seasons of inventory at once.

New home sales fell 10.9% month-over-month in September, and 17.6% on an annual basis. It appears the Federal Reserve’s series of big interest rate hikes are starting to have an impact. Additionally, mortgage rates rose to 7%, while construction materials remain more costly.