The United States economy runs on consumer spending, consumer spending accounts for roughly two-thirds of economic activity in the United States. Despite recently tight financial conditions and high relative inflation, consumer spending has been remarkably strong in recent months. Aimee Picchi of CBS News wrote, “The American economy, the world's biggest, has shown surprising resilience in the face of sharply higher borrowing rates as the Federal Reserve tightened monetary policy in a bid to tame inflation. Despite widespread predictions that the economy would succumb to a recession, however, it has kept growing, with hiring and consumer spending holding steady.” Consumer spending increased by 3.7% in the third quarter of 2024, this was the biggest increase in the last year and a half. A strong third quarter should bode well for a strong fourth quarter (the last three months of the year). Strong consumer spending heading into 2025 is a great sign as most economists are expecting 2025 to be a really strong year financially. The prospect of lower inflation and lower interest rates have many excited for the growth possibilities that 2025 could offer.
The Bureau of Economic Analysis reports monthly consumer spending data and they just released their report for September 2024. The following is from the summary they gave of their report, “Personal income increased $71.6 billion (0.3 percent at a monthly rate) in September. Disposable personal income , personal income less personal current taxes, increased $57.4 billion (0.3 percent) and personal consumption expenditures increased $105.8 billion (0.5 percent). The PCE price index increased 0.2 percent. Excluding food and energy, the PCE price index increased 0.3 percent. Real DPI increased 0.1 percent in September and real PCE increased 0.4 percent; goods increased 0.7 percent and services increased 0.2 percent.”
The report highlights two extremely positive data points for September, increased incomes and increased consumer spending. These two increases in tandem paint a really strong picture for the economy. More money is flowing towards each consumer and so consumers are increasing their outflows. On top of this, each month’s inflation data is getting closer to the Fed’s goal of 2% and the Fed is in the midst of an interest rate cutting campaign. All of these things come together to indicate that financial situations are improving and should continue to improve for consumers across the nation.
There were a couple data points from the BEA’s report that are slightly concerning. As the chart below shows, the increase in spending overshadowed the increase in income in September. This has been the case in every month this year except April. In addition to this, the national savings rate, the percentage of their income that consumers are putting in savings, fell from 4.6% to 4.4% in September. These changes are by no means cause for alarm, but they are definitely worth watching. The hope is that rate cuts will continue to bring down inflation, allowing consumers to pay less for the same volume of items and put the money saved aside.
Overall, there is a lot of positive coming out of this data report. James Hyerczyk of FXEmpire wrote, “Today’s data paints a picture of a resilient consumer base, stable income growth, and rising labor costs. With Core PCE inflation within target and spending above expectations, the economic outlook remains cautiously optimistic.” With so much to look forward to, consumer confidence saw a strong uptick in October, this shows that consumers are optimistic about the financial path forward. Consumer optimism equates to more spending in future months, which is really good news for our economy.
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