U.S. Personal Consumer Spending Takes a Hit

Daily Forex Fundamentals | Written by RBC Financial Group | Oct 31 08 13:37 GMT |

Personal consumer expenditure (PCE) fell 0.3% in September following unchanged spending in August. Market expectations had been for spending to fall 0.2% in the month. The decline occurred despite a 0.2% rise in personal income. The decline in consumer spending was led by the durables component, which dropped 3.1% as auto sales fell to an annualized 12.5 million units. Weakness was also evident in the non-durables component, although the decline was a more moderate 0.6%. The services component managed to rise 0.3%. On a constant dollar basis, the pattern of spending was very similar. Overall consumer spending fell 0.4% after no change in August. The drop was led by durables (-2.9%) and to a lesser extent non-durables (-0.8%) with the services component up marginally (+0.2%). The core PCE deflator rose 0.2%, slightly greater than the 0.1% expected going into the report. However, the increase did not prevent the year-over-year rate dropping slightly to 2.4% from 2.5% in August. The decline in constant dollar consumer spending in September was already reflected in yesterday's third-quarter advance GDP report showing that consumer spending plunged an annualized 3.1%. Some of the weakness in the quarter may have reflected personal spending returning to its previous trend level after being temporarily boosted by the tax rebate cheques issued in the second quarter. However, with suggestions that employment declines are possibly intensifying and that spending momentum faltered late in the third quarter, the risks are that consumer spending will likely continue to decline in the final quarter of the year. The Fed's 50 basis-point reduction in the Fed funds rate earlier this week to a highly stimulative 1.00% was in part meant to address these downward pressures to growth. We expect these stimulative conditions to be maintained through next year to help sustain a return to positive growth over the course of 2009. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.