PCE lowest since Nov 2021; Core index slips below 5%

The Bureau of Economic Analysis (BEA) released its Personal Income and Outlays report for November 2022, which showed that the PCE Price Index, the inflation gauge most closely tracked by the Fed, rose by 0.1% compared to market estimates of 0.2%.  

On an annual basis, the PCE Index fell below the 6% level and registered a rise of 5.5%. This was the first sub-6% reading since December 2021.

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The core PCE index (excluding food items and energy) increased by 0.2% month-over-month, marking the lowest such advance since July 2022, and easing from 0.3% in October.

Year on year, the core index moderated to 4.7%, the first sub-5% reading since August 2022, and a shade above market expectations of 4.6%.

Personal consumption expenditures witnessed a sharp drop month-over-month from 0.9% in October over September, to 0.1% in November over October, following the increase in the feds funds rate to 4%+ levels (commentary on which can be found here).

Household expenditure ticked up in the services categories but eased in the goods sector as holiday shopping remained muted particularly among lower-income earners.

Personal incomes and data revisions

Personal incomes rose by $80.1 bn or 0.4%, while disposable personal incomes (DPI) came in higher by $68.6 bn or 0.4%, in the month of November.

The data exceeded WSJ estimates that personal incomes would grow by 0.3% in November.

DPI for the month of September was revised upwards from $59.3 bn to $67.6 bn, rising from 0.3% to 0.4%, over the previous month.

October data was also revised upwards from $132.9 bn to $135.4 bn, with the month-on-month growth rate staying steady at 0.7%.

Personal consumption expenditures were revised downwards from $110.1 bn to $105.9 bn for the month of September, and upwards from $147.9 bn to $151.5 bn in October.

Fed relief but uncertain road ahead

The reduction in the PCE is welcome news for Fed officials, particularly given that the annual PCE index and core PCE index have fallen below the 6% and 5% markers, respectively.

In an article earlier in the year, I noted that Krishna Guha, Vice Chairman of Evercore ISI believed that,  

…on a two to three-year time horizon and beyond, the Fed owns inflation in the US, period.

In line with his comment, earlier in the month, the CPI eased to 7.1% YoY, which I discussed here.

Though the measure is at extreme levels on a historical basis, it has fallen meaningfully from the June reading of 9.1%.

Having said that, monetary authorities are still a significant distance from the 2% PCE target.

In an earlier piece, I noted that Bank of America’s Head of Global Economic Research, Ethan Harris, expected that the Fed would likely be able to bring inflation down to 3%-4% levels, but would face significant difficulties in trying to move any lower.

This divergence in opinions is due to varying assessments of the Fed’s credibility in the international markets and the willpower of committee members to stay the course in increasingly tumultuous economic conditions.

Consumer sentiment data released by the University of Michigan for the month of December showed an uptick to 59.7 from 56.8 in November, but a deterioration of 15.4% on an annual basis.

Data on current economic conditions, however, only improved by 1% since November 2022 but was down 19.9% in the past 12 months.

Yet, in the first meeting of the FOMC next year, markets can expect a rate hike of at least 25 bps, with the latest data from the CME FedWatch Tool showing a 65.9% chance of a quarter per cent hike and 34.1% of another half-point increase.

Outlook

Although personal incomes ticked higher, spending appears to have cooled moving into the holiday period.

The Survey of Consumers data released last month by the University of Michigan showed that 47%, 55% and 58% of the upper third, the middle third and lower third of income earners, respectively, were expecting to cut back on expenses over the coming twelve months.

With a recession in the offing, lower-income families in particular are likely concerned about drawing down on their savings, which may have dragged down consumer spending in the previous month.

Over the coming two to three weeks, the market will formulate a good idea of how December spending performed in light of the holiday season and mixed reports from across US retail.