Decline in savings rate is cause for concern

INDICATOR: September Spending and Income

KEY DATA: Consumption: +1.0 percent; Disposable Income: +0.4 percent; Prices: +0.4 percent; Savings Rate: 3.1 percent

IN A NUTSHELL: “Consumers spent like crazy in September, but the declining savings rate is a warning sign that they may not be able to keep it up.”

WHAT IT MEANS: Last week, the third quarter GDP report was released and it indicated that September consumer spending was really strong. And it was. Indeed, the rise was the largest in eight years. But before we get too excited, keep in mind that much of the gain was due to a surge in vehicle sales. That was likely the result of many people replacing their hurricane-destroyed vehicles. Thus, we cannot take too much solace in the robust durable goods number.

There was also a jump in nondurable goods demand, but much of that may have come from the sharp rise in energy costs that resulted from the temporary supply dislocations. Indeed, when the nondurable goods increase was adjusted for price changes, the increase was solid but nothing great.

Finally, spending on services, the largest component, was also decent but nothing that would indicate the consumer has become irrationally exuberant. On the inflation front, prices were up sharply but when food and energy were removed, there was only a modest increase in consumer costs.

As for income, there was a solid increase as wage and salary gains rebounded from a minimal rise in August. Not surprisingly, given the surging stock market, dividend income was up sharply. Still, the gain in incomes did not come close to matching the jump in spending and the savings rate fell again. It is down to 3.1 percent.

MARKETS AND FED POLICY IMPLICATIONS: On the surface, this looks like a really strong report and the consumption rise did keep third quarter consumption from faltering significantly. But it is doubtful we will see a repeat of the huge vehicle sales going forward and that means household spending may slow in the coming months.