FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
• President Biden removed months of speculation by announcing his nomination of current Fed Chair Jerome Powell
for a second term to head the Central Bank. He will be joined by Governor Brainard who the President nominated
for Vice-Chair. The appointments eased one area of uncertainty around future monetary policy.
• U.S. personal income and outlays gave a reassuring picture of economic momentum heading into the fourth quarter.
Spending on both goods and services accelerated notably in financial news.
• Inflation, as measured by the personal consumption expenditure (PCE) deflator continued to accelerate in October.
Core PCE – the Fed’s preferred gauge of inflation – rose to 4.1% year-on-year, adding to concerns depicted in the
FOMC’s November meeting minutes that price pressures were more persistent and pervasive than previously thought.
U.S. – Consumer Spending Powers
In a week shortened by the Thanksgiving holiday, the U.S. economic calendar was packed. Let’s kick things off with the BEA’s second estimate for third quarter GDP. Economic growth was revised up one tenth of a percentage point to 2.1% annualized. This represents a slowing of economic activity from 6.3% and 6.7% in Q1 and Q2 respectively. The marginal revision reflected a small upgrade to consumer spending that was partially offset by a downward revision to business investment. Given the strength of consumer spending in October (discussed below), we expect a rebound in fourth quarter GDP more in line with the numbers reported for Q1 and Q2.
Up next in Financial News is October’s personal income and spending. The data showed that personal income rose by 0.5% month-on-month (m/m), with the gain primarily reflecting an increase in compensation of employees (up 0.8%) and income receipts on assets (up 0.9%). These were partly offset by a decline in current transfer receipts (down 0.5%). Unfortunately, inflation ate away those nominal gains. Real personal disposable income fell by 0.3% in October, an improvement from the 1.6% decline posted in September.
Nominal personal spending rose by 1.3% m/m in October (up 0.7% in real terms). Goods spending accelerated to 2.2% (from 0.9% in September) and spending on services rose by 0.9% (up from 0.5% in September). Spending on durable goods continued to exceed its pre-pandemic share with consumers spending about 13% of their total expenditures on durables – up from an average of 10% in 2019.
The personal consumption expenditure (PCE) price deflator rose by 0.6% m/m in October. Year-over-year (y/y) it was up 5.0%, 1.2 percentage points below the CPI inflation rate (Chart 1). Excluding food and energy, core PCE inflation rose 0.4% m/m and accelerated to 4.1% y/y (from 3.7%) – like its CPI counterpart, hitting a fresh 30-year high. The core PCE deflator has been running ahead of the Fed’s long-term 2% target since April of this year.
With spending outpacing income, the personal saving rate dropped to 7.3% in October from an upwardly revised 8.2% in September (Chart 2). The figure now stands below the pre-pandemic average of 7.5%, as consumers drawdown excess savings amassed during the pandemic to compensate for months of restricted economic activity (see report).
To wrap things up we turn to activities at the Fed. President Biden announced that he will nominate Jerome Powell to retain his seat at the head of the central bank, with Lael Brainard joining him as Vice-Chair. The announcement ends months of speculation and signals continuity in U.S. monetary policy amid public concerns about inflation.
The central bank also released minutes of its November meeting. The minutes showed continued concerns about widespread price pressures. Chair Powell noted that inflation came in higher than expected and supply bottlenecks were more persistent than initially thought. ‘Uncertainty’ and ‘flexibility’ were key themes. With the potential for a new more contagious COVID-19 variant emerging, the Fed has positioned itself to respond quickly should the realized path of economic activity diverge from expectations.
Shernette McLeod, Economist , 416-415-0413
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