Forex Investment and Currency Trading

Personal consumption fell by a less-than-expected 0.6% in November, following a 1% decline in October. However, the entire decline was due to a sharp drop in inflation (PCE price index fell 1.1%), reflecting plunging gasoline prices and to a lesser extent holiday-related discounting. Real consumption rose 0.6%, the first increase since May. The gain was fairly widespread as real spending on durables, non-durables and services rose by 0.6%, 1.5% and 0.1%, respectively. The upward surprise in real consumption suggests a smaller decline in Q4 real PCE. Even assuming a modest-size decline in spending in December, real consumption now looks likely to decline by 2.5%.

Personal income fell 0.2% m/m, below expectations. The decline in income is consistent with the sharp drop in non-farm payrolls and hours worked. Netting out the decline in taxes, disposable personal income fell 0.1%. However, again, price effects played a role and real disposable income rose a solid 1.0%.

As noted above, the PCE price index fell 1.1% m/m, dragging the y/y rate down to 1.4% from 3.2% in October. The core PCE price index, which nets out food and energy, was unchanged in November. On a y/y basis, the core PCE price index fell to 1.9%, below the upper boundary of the Fed’s implicit comfort zone (for the first time in three and half years).

On balance, this report was better than the headline suggests. The sharp decline in inflation has boosted real income growth and has increased consumer purchasing power. While it is encouraged by the increase in real spending,  market still expects a weak trend in consumption in the near term as consumers struggle with rising unemployment and tight credit as well as evaporating housing and financial wealth.