The US Economy “Is Running Hot,” Lots of Consumer Spending Growth, Lots of Inflation. The Bond Market Sees it Too

Spending on discretionary goods and services that people buy to have fun with was particularly motivated. By Wolf Richter for WOLF STREET. Adjusted for inflation, lots of inflation, consumer spending in August rose by 0.55% month-to-month and by 2.6% year-over-year, according to the Bureau of Economic Analysis today. Americans have been out there spending despite soaring gasoline prices, AI-will-kill-us-all-mongering by AI companies, geopolitical chaos on the front pages… you name it, we have it – but no problem, the spending must go on, including or especially on discretionary experiences, such as restaurants meals and lodging, and on discretionary goods, such as recreational vehicles. Not adjusted for inflation, consumer spending in August jumped by 0.86% from July, and by 6.1% year-over-year, to an annual rate of $22.3 trillion (red in the chart below). These are big growth numbers, and we’ll see some bigger ones below, but there was a lot of inflation too. This is how an economy “is running hot” – lots of spending growth and lots of inflation. Of the total amount spent: - 69% got spent on services; half of that went to healthcare services (not including healthcare products) and housing combined. - 11% got spent on durable goods, such as motor vehicles, recreational vehicles, computers, furniture, appliances, etc. - 20% got spent on nondurable goods, such as pharmaceutical products, food, gasoline, clothing, footwear, household supplies, etc. Food prices and gasoline prices are constantly in people’s faces, and when they rise, they piss people off, but they account for only a relatively small part of total consumer spending. Spending on food and beverages at stores accounted for 7.0% of total consumer spending (dotted blue line). Gasoline and other energy goods accounted for 2.3% of total consumer spending, up from a share of 1.9% before prices began to spike (double green line). This relatively small share of total spending is in effect why the recent gasoline price spikes, and the 2021-2022 food and gasoline price spikes didn’t derail the economy. About inflation adjustments: Price changes for each good and service that is in the consumer basket are tracked at that level, and spending on these goods and services is then adjusted for inflation by the price changes for those specific goods and services. For example, if gasoline prices spike by 10%, “real” spending on gasoline is adjusted for 10% in price changes of gasoline. So, over time, gasoline sales adjusted for inflation are nearly flat, with seasonal variations and a slight downward trend, roughly paralleling gasoline consumption in gallons. And if rents rise 2%, “real” spending on rents is adjusted for 2% in price changes. Then the price changes for each product are combined and form the overall inflation rates. So to see where people actually spend their money, we need to look at nominal spending, not adjusted for inflation. Spending on services, not adjusted for inflation rose by 0.50% month to month and by 5.9% year-over-year in August. Spending on services is dominated by housing, which accounts for 17.9% of total consumer spending, and by healthcare services (includes health insurance but not healthcare goods), which account for 17.3% of total spending. Spending rose in: - Housing and utilities: +0.26% monthly; +4.5% YoY (blue in the chart below). - Healthcare services: +0.39% monthly; +6.8% YoY (red). - Other services: +1.03% monthly; +4.9% YoY (double gold). - Financial services and insurance (not including health insurance): +0.48% monthly; +7.6% YoY (big dotted green). - Food services and accommodation: +1.31% monthly; +5.2% YoY (small dotted dark-blue). Spending on nondurable goods spiked by 1.5% in August from July and by 5.9% year-over-year. The big driver was gasoline due to the price spike. If the price spikes are taken into account, “real” spending on gasoline (adjusted for price changes of gasoline) declined month-to-month and year-over-year. Pharmaceutical products and medicines dominate the “Other nondurable goods” category. In addition, this category includes games, toys, pet items, etc.; household supplies; personal care products; tobacco products; magazines, newspapers… Spending rose in: - Other nondurable goods (mostly medical goods): +1.45% monthly, +4.5% YoY (red) - Food and beverages bought at stores: +0.74% monthly, +2.4% YoY (blue) - Clothing and footwear: +1.5% monthly, +6.9% YoY (double gold) - Gasoline: 4.3% monthly, +24% YoY (big dotted green). Spending on durable goods spiked by 2.0% month-to-month and by 6.4% year-over-year, not adjusted for price changes. “Recreational goods and vehicles,” the #2 category of durable goods, are what consumers buy to have a blast with. This is discretionary spending: ATVs, snowmobiles, motorhomes, travel trailers, dirt bikes; video, audio, and photographic equipment; computers, tablets, and software used for entertainment; bicycles; hunting, fishing, and camping equipment; musical instruments; recreational books; and other stuff. Spending rose in: - Motor vehicles & parts: +2.5% month-to-month, +7.3% YoY (red). - Recreational goods and vehicles: +2.3% monthly, +8.8% YoY (blue). - Furnishings and household equipment: +1.2% monthly; +5.9% YoY (double gold). - Other durable goods: +1.3% monthly; +6.4% YoY (big dotted green). These dizzying rates of consumer spending growth amid lots of inflation show that the economy is “running hot.” That trend is also visible among businesses, where massive amounts of investments are now getting plowed into infrastructure; for businesses, inflation, as measured by the PPI, has been substantially hotter than for consumers. And of course, federal government deficit-spending has been running hot for years. This is a powerful mixture. And the bond market is seeing it too. The 10-year Treasury yield today rose to 5.30%, welcome back to the normal range, so to speak, highest since mid-2007, just before the Fed’s interest rate repression and QE began to systematically demolish the bond market. In case you missed it: Not Even the Massive Changes of Methodology Can Get PCE Inflation Back into the Bottle Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how: U.S. bond yields post biggest jump in a generation as global rout rattles investors Howdy SoCal BD. The youngin generation has been ZIRPed, QEed, Dopeed, and has no idea what is coming. Except for the Lone Wolf Readers that is. Howdy Folks. How dare Americans continue on with their lives. Keep Sailing till Death. Spent a few days on Maui. Plenty of tourists spending plenty. Decided to take my wife ti Mama’s in Paia. Maui’s iconic fresh fish venu. They were nice enough to squeeze us at the bar for lunch. They are booked for lunch and dinner 4 to 5 months out. Hard to get out of there less than $250 for lunch. It’s literally always been that way. In fact, they used to be booked even further out then that. We had to book 6 months out couple years ago. Wolf, I’m not sure where you got the gasoline and energy expenses as 2.3% of consumer spending, but I find that low percentage ludicrous. People that have to drive any amount to work would spend that in a week. And energy in the summer and winter is far, far above that 2.3%. Please tell us where you picked up those percentages. Average household makes $88k Average car gets 30 mpg Average driver drives 12,000 miles per year. Average gas price is $4.40 Average gas expenditure is $1750/year, which is 2% of $88k. I don’t think wolf is the one making up the numbers haha Jon 1. data is from the BEA. Read the first paragraph at least. 2. median married-couple income in the US = $120,000 and quite a bit more in California. Meaning, 50% of the married couple households make over $120k a year. 3. We have one car (hybrid) that gets 40-50 mpg. My wife drives it to work every day. so that’s about 15 gallons a month, at $6 = $90 a month = $1,080 a year. I’m on foot, good for a radius of 4 miles (8 miles out and back total) around our place. If it’s farther, I take mass-transit for part of it. So a household with two incomes, some investment income, and SS, pays $1,080 for gas a year. 4. Many people here don’t have a car at all because they don’t need one. For them gasoline = 0% of household income. 5. Lots of people drive EVs, as do you, according to you. Gasoline = 0% of their total income. The magnitude of personal consumption expenditure for healthcare services is an eye opener. We often think of personal consumption expenditures as discretionary — consumers deciding how much of their income to consume or save. And when prices change, we can adjust our consumption preferences. However, with healthcare services, we have very little discretion. Healthcare services are mostly paid by third parties and the consumption levels and prices are mostly nondiscretionary. We get sick or injured, but it’s mostly a mostly opaque system of private and public medical insurance that pays healthcare providers a lot of money on our behalf, the prices for which are mostly unseen and mostly decided after the fact. It’s a component of personal consumption expenditure over which “persons” as consumers have little control. That is why physical exercise, eating healthy and sleeping well save you lots of money down the line. “However, with healthcare services, we have very little discretion.” You have plenty of discretion. Just do like myself and follow truck drivers and ignore health problems. Besides we all know the clankers are going to end the need for jobs and working class humans in a matter of months so we need the human population to die off asap. Call me crazy but looks like FRED adjusted the personal saving rate up for the entire year! We were hovering in the mid 2s for a while now it’s all higher after latest update…. What gives? FRED doesn’t do anything. FRED is a database that captures the data released by others. This data here and the savings rate, etc. were released by the BEA. Yeah, sorry you’re disappointed that the consumer isn’t collapsing. Is this COVID excess still? Debt funded? Where is all the money coming from? Is it all just the boomers spending their massive capital gains? Those 3% annual raises aren’t doing much for many of us white collar, non- healthcare workers Peak spending on everything is 47 years old in America, so we got a LOT more millennials and Gen Z turning 47 until the year 2053, before it turns down again for Generation alpha – so this is going to go up up up for a while! Income-funded, and they saved the rest. People are making lots of money. The median married-couple household income in the US is $120k. It’s a lot higher in California and other expensive states, and lower in cheap states. This idiotic BS that most people live from paycheck to paycheck and are tapped out or whatever gives people brainfog and they cannot understand where “all this money is coming from.” If you’ve read my articles here about consumers for the past five years, there would be no doubt in your mind where all this money is coming from: income. Hi Wolf, how much of this growth is due to the decline in savings rates? Or does that not matter? If the drop in savings increases available budget by 300-400 billion, that party will end eventually, right? So this inflation can’t last forever. We will have stagflation soon? They’re still earning more than they’re spending. In August they saved 4.1% of their income. the savings rate is just the difference between income and spending divided by income. But it doesn’t measure income from capital gains, for example. Where does this stupid stagflation BS keep coming from? Running hot is yield. There has normally been some bond buying overnight then premarket bonds start to sell off. Tonight yields are spiking ten at 5.34 20 at 5.73 30 at 5.68 what do you think Bessent or Warsh can do to stop the bleeding? This sell off is relentless “Oil prices rise as Chinese refiners reportedly ban October fuel exports; Brent back above $100” No doubt what caused that yield spike How does Bessent fix that?