Income and spendingSeptember's personal income and spending report showed again that the U.S. economy is suffering from a lack of demand, in large part due to the nation's high 9.6% unemployment rate. The poor report will likely support the argument of Fed officials who want to use continued low interest rates and more quantitative easing to increase demand to get the U.S. economy to grow faster.

The biggest concern is that personal income unexpectedly fell 0.1% in September, after a Bloomberg survey had forecast a 0.3% rise. Also, August's personal income stat was revised downward to an increase of 0.4%, from the previously released 0.5% rise. Personal income was 0.2% higher in July.

The September dip is worrisome because rising incomes are needed increase disposable income -- cash that Americans can use to invest or spend. However, consumer spending was also lower than expected in September, rising just 0.2% -- one-half the 0.4% Bloomberg estimate. Consumer spending rose 0.5% in both August and July.

Dangerously Close to Deflation

If the deceleration in consumer spending continues in the months ahead, it will weigh on GDP growth, given the large role this category plays in the U.S. economy.

In addition, a key indicator of inflation that the Fed closely monitors showed a U.S. price environment that's dangerously close to deflation. The personal consumer expenditure (PCE) index rose just 0.1%. However, the more-telling core PCE index -- which excludes often-volatile food and energy prices -- was flat. That's below the 0.1% increase projected in the Bloomberg survey.

The core PCE index is up just 1.2% on a year-over-year basis, down from the 1.3% year-over-year rate recorded in August. That's just about as low as the Fed wants year-over-year core inflation to be.

One additional September income/outlay statistic reflected a mixed result for the U.S. economy. The savings rate fell to 5.3% in September from 5.6% in August, but it's still at a relatively high rate. On the one hand, a high savings rate is beneficial in the long term because it will increase the supply of capital available for investment -- and help rebuild Americans' nest eggs.

However, in the short term it takes dollars away from consumption, making it hard for the U.S. economy to grow at an adequate rate.

No Pressure on Wages


September's personal income and consumer spending reports represent a net negative for policymakers' effort to get the U.S. economy to grow faster and create more jobs. The 0.1% personal income decline is typical of a labor market where many job segments are exhibiting little "wage leverage." Employers are confident that employees won't be seeking a promotion or pay increase because so few jobs are available. With no pressing reason to hike wages, subpar income growth is the result.

Plus, Americans are aware of their stagnant incomes, and they're not spending as much, leading to smaller consumer spending increases such as September's 0.2% increase.

Finally, the lack of income growth and consumer spending has taken a great deal of demand out of the U.S. economy, giving companies little pricing power -- evident in the core PCE index's drop to a dangerously low 1.2% increase. Some companies are being forced to cut prices to move inventory and/or attract buyers. If price cuts become pervasive, that could lead to deflation, a protracted, systematic decline in prices and wages.

While some Fed officials may argue that they see long-term improvement in both income and consumer spending, the September report is more likely to aid the Fed policymakers who believe the central bank needs to do more to stimulate the world's largest economy.

Combine the September income and spending reports with the current sluggish job growth, and the picture is one of an economy that needs higher levels of employment, investment and spending. And soon.

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jbluhm1951

The "Baby Boom Generation better get booming. The election was a start. While we "baby Boomers are still strong we had better take back our country for our children and grandchildren before these young politicians destroy our country. This thing of always voting for the Democrats or Republicans need to be revised to vote for those who care about keeping our country strong as a Republic and not as a socialist society. In the old days we called communist policies like they were, today liberals say everything goes. Conservatives speak out and get out because if we and the Conservative Baby Boomers, and the seniors who care about their children and grandchildrens future don't express ourselves this country will certainly continue its present spiral south.

November 14 2010 at 12:47 PM Report abuse rate up rate down Reply
jbluhm1951

The Fed needs to come out and tell the American people it will do nothing. Stop printing money and stop sending our country into more debt. The Fed should raise interest rates, but out positive vibes and allow the economy to heal. The "Bush Tax Cuts should be at least temporairily kept in place for the middle class as well as the wealthy. Ameircans would be willing after jobs pick up to pay a little more in taxes if they were convinced the taxes would go to pay down the debt, shore up social security and medicare, but no one beleives the government can stop spending, especially with our Presidents desire to spend, spend, spend.

November 14 2010 at 12:38 PM Report abuse rate up rate down Reply
Robert & Lisa

The demoncrats take more and more from we the people, not realizing they, like parasites will eventually kill the host animal (our country) and as a result themselves. Stupidity reigns supreme.

November 02 2010 at 8:12 AM Report abuse +1 rate up rate down Reply
Robert & Lisa

Businesses produce goods and services that improve our standard of living. Government does the opposite. So, do you want communism where everyone but the elite are dirt poor, or do you want a nation where the government is held in check and businesses thrive producing goods and services that benefit all? If you want to be poor with everyone else, vote demoncrat, if you want an opportunity for you and your kids to do well, vote republican.

November 02 2010 at 8:11 AM Report abuse +1 rate up rate down Reply
sfamilyent

In order for our workers to compete in the global economy for jobs, we have to take pay cuts... In order to entice businesses to operate within our borders we are talking about cutting taxes... Businesses win but our people lose in this scenario. As unpopular as it may seem, we need to shift our economic and trade policies away from "free trade" and take a somewhat protectionist position - especially with respect to countries that have adopted export based economic growth policies and that subsidize and protect their domestic production. Labor, business and government in our country need to cooperate to compete in the global economy.

November 02 2010 at 7:27 AM Report abuse -1 rate up rate down Reply
MSmailbox

All chips are on the Fed, please stand clear of the table, the wheel is spinning...

November 01 2010 at 10:33 PM Report abuse rate up rate down Reply
punnster

Is it remotely possible that political ideology is no substitute for sound economics?

November 01 2010 at 9:48 PM Report abuse +2 rate up rate down Reply
prognesub

The Fed never quit moving to prop up this phoney economy. It is now Fed to the end.

November 01 2010 at 7:16 PM Report abuse +3 rate up rate down Reply
sifiso

Today’s personal income data showed a drop. I think this makes the Fed’s quantitative easing initiative look stupid. Inflation drives up prices; but people are making less money. And that’s not even counting the people that are out of work. Lower Interest Rates are married to consumer sentiment, and they have less money. Guess what? Not looking good- http://www.hiddenlevers.com/hl/u?a47IB4 Consumer Sentiment mirrors Dollar weakness- http://www.hiddenlevers.com/hl/u?a0ng1M

November 01 2010 at 5:50 PM Report abuse -2 rate up rate down Reply
glasses60

My generation was told to do without while you are young in order to save for old age. Where do we put that nest egg which was supposed to supplement social security? This administration just keeps hitting the seniors over and over. Who would have thought that a 5 year CD would be paying 1% interest. Our income keeps going down and expenses keep going up. Wait until January and see the increase in medical insurance premiums because of Obama's healthcare program. This administration must really hate seniors.

November 01 2010 at 4:53 PM Report abuse +2 rate up rate down Reply