Personal incomes fell 2.7% in August, according to data that is by now so stale that one struggles to see how it could move the needle when the pre-election news cycle is spinning as fast as it is. The market was looking for a 2.5% drop.
Personal spending, meanwhile, rose 1% for the month, a touch better than the expected 0.8% rise, but still below July’s pace, which was itself revised down.
The BEA attributes the decline in incomes to the expiration of the extra federal unemployment supplement which Democrats are hoping to restore as part of a new stimulus package. Donald Trump’s August executive order provided some additional benefits, but implementation hurdles and the finite nature of the funding (diverted from disaster relief) arguably created more uncertainty and served as an excuse for lawmakers to dither.
“The decrease in personal income in August was more than accounted for by a decrease in unemployment insurance benefits”, the government said. “In particular, the Federal Pandemic Unemployment Compensation program which provided a temporary weekly supplemental payment of $600 for those receiving unemployment benefits expired on July 31”.
Take away the checks and “incomes” fall. Imagine that, right? A separate report Thursday showed jobless claims remain elevated above pre-pandemic records, although obviously well off the catastrophic levels seen earlier this year.
“The data holds limited market-moving potential if for no other reason than the inherent backward-looking nature of the release will be overwhelmed by developments on what lays ahead”, BMO’s rates team said Thursday, of the income and spending figures.
The release wasn’t a total waste of time, though. The PCE prints were notable. PCE inflation rose 1.4% YoY in August, and core PCE rose 1.6%. Those are both hotter than expected, assuming you want to call figures that are still a mile away from target “hot”.
If PCE moves back up to target anytime soon, it will raise questions about average inflation targeting just months after Jerome Powell’s unveil.
Obviously, the Fed would welcome such an outcome (that’s the whole point), but considering the commitment to keeping rates at the ZLB for three years, a quick move up to target would likely prompt concern that the acceleration is perhaps indicative of an overshoot coming faster than officials expected. If it coincides with a larger fiscal impulse, the topic could become more urgent.
That would validate Robert Kaplan’s stance, which is essentially that the Fed should have eschewed explicit outcome-based forward guidance for the standard approach of simply stating that rates will remain at zero until there’s convincing evidence that inflation is on the way to target and poised to stay there sustainably.
In any event, that’s a discussion for another time. It’s just a matter of whether that time comes next year, in 2022, or never.
We still have no real idea of whether the pandemic’s near-term deflationary impact will overwhelm the medium- to longer-term inflationary impulse from things like re-shoring and supply chain disruptions. No clarity on that is forthcoming.