Consumer Spending Advanced in August, Core Inflation Is Within "Comfort Zone"

Inflation adjusted consumer spending rose 0.6% in August following a 0.3% gain in July. The strength was in durable goods purchases (+2.8% vs. -0.3% in July) and services (+0.6% vs. +0.3% in July). Spending on non-durables was virtually steady in August. The July-August average for consumer expenditures points to a third quarter increase that is noticeably higher than the 1.4% reading of the second quarter. However, soft numbers for September could alter this projection.

Personal income increased 0.3% in August after a 0.5% gain in July, reflecting only a 0.2% increase in wages and salaries. Personal saving as a percent of disposable income was 0.7%. In the first eight months of the year, personal saving is running at an average of 0.8%, compared with a 0.5% and 0.4% readings in 2005 and 2006, respectively.

The personal consumption expenditure price index fell 0.1% in August due to lower energy prices. The core personal consumption expenditure price index excluding food and energy rose only 0.1% in August, putting the year-to-year increase at 1.76% compared with gains of 1.92% and 1.91% in June and July, respectively. The cycle peak appears to be a 2.46% increase in February 2007. This places core inflation well within the Fed??™s comfort zone of below 2.0% year-to-year increase. This is significant because it gives the FOMC flexibility to place a greater emphasis on weakening economic conditions and reduce the concern about inflation.

Residential Construction Remains Weak in August
Total construction spending rose 0.2% in August, following two consecutive monthly declines. The 2.3% jump in private sector non-residential construction spending and 1.2% increase in public construction outlays more than offset the 1.5% decline in private residential construction spending. The July-August average of residential construction spending points to a sharper drop in residential construction spending (proxy for residential investment expenditures in GDP accounts) during the third quarter compared with the second quarter decline, which implies that residential investment expenditures are most likely to make a larger negative contribution to real GDP in the third quarter vs. the second quarter. At the same time, the strength in private non-residential construction expenditures suggests a positive contribution to GDP in the third quarter.