Consumer spending grew more slowly in October and real disposable personal incomes expanded for the first time in months. Meanwhile, headline inflation was flat due, in part, to a decline in energy prices. Core inflation continued to moderate. The Fed will likely be encouraged by this print—the economy is cooling in the right ways. We no longer believe the Fed will raise interest rates in December, but don’t envision any cuts until mid-2024. The probability of an economic soft landing continues to increase, but we maintain that a period of economic weakness remains more likely in early 2024.

Highlights

Collectively, these data showed that incomes rose in a way that make spending growth sustainable. For months real personal consumption expenditure growth outstripped real personal disposable income growth – forcing consumers to draw down on savings and leverage debt to finance the difference. These data, however, show that the two flows are now more in balance. Indeed, we saw savings rise for the month. While these data only represent one month, this deviation from trend is needed to achieve a soft landing for the economy. If it continues, which we are not confident it will at this point, we may see anemic economic growth in early 2024 as opposed to an outright contraction.

There was good news on the inflation front as well. The headline deflator was flat for the month, in part because of a decline in energy prices. This drove the topline year-on-year inflation rate to 3.0% - the lowest rate since early 2021. Meanwhile, the core deflator cooled as well. In month-on-month terms, inflation ex-energy and food (core) came in at 0.2% (actually 0.16%). This pushed the year-on-year rate down to 3.5% - the lowest rate since mid-2021. While these inflation readings remain elevated they are steadily moving in the right direction. We believe the Fed’s 2% target will be achieved by the end of 2024.

Inflation

Headline PCE price inflation slowed from 3.4 to 3.0% y/y in October and core PCE price inflation (which excludes food and energy) slowed from 3.7 to 3.5% y/y. On a month-over-month basis, headline PCE inflation was flat and core PCE inflation rose 0.2%. Prices for goods fell 0.3% m/m and services rose 0.2 percent m/m. Energy prices fell 2.6% m/m.

Incomes

Overall personal income rose 0.2% m/m (in nominal terms) in October, vs. 0.4% m/m in September. When factoring in inflation, the real month-over-month growth rate was 0.2% m/m – the strongest reading in five months. In year-over-year terms, real personal income rose 1.5% in October, vs. 1.4% in September. Meanwhile, real disposable personal income (which is personal income less taxes) rose by 0.3% m/m – also the strongest reading in five months. Finally, the savings rate rose to 3.8% from 3.7% of disposable personal income.

Spending

Personal consumption expenditures rose by 0.2% m/m (in nominal terms) in October, vs. 0.7% m/m percent in September. Spending on services rose by 0.4% m/m while spending on goods fell 0.2% m/m. After accounting for inflation, real consumer spending was up 0.2% m/m in October with spending on services rising 0.2% m/m and spending of goods rising 0.1% m/m.