Household Purchasing Power Falls as Spending Stalls
September’s spending increase looks less reassuring once higher prices are taken out. The Bureau of Economic Analysis reported on October 29 that consumer spending rose 0.5% in dollar terms, but increased less than 0.1% after inflation, while disposable income after inflation fell 0.3%. For the Fly High universe, that matters because customers’ purchasing power helps determine whether businesses can turn sales into the cash needed to pay rent and interest.
The pressure came alongside faster monthly inflation. The personal consumption expenditures price index, which measures prices across household purchases, rose 0.5% in September after 0.3% in August. Excluding food and energy, prices increased 0.3% in both months. Those differences matter: the broader acceleration was not matched by an acceleration in that underlying monthly measure, although neither result establishes that inflation pressure has passed.
There is also a substantial counterweight to the weaker September household figures. A separate BEA report put third-quarter economic growth at a 3.4% annualized pace, up from 2.2% in the second quarter. Consumer spending and private fixed investment, which includes housing as well as business assets, together grew at a 4.9% annualized rate after inflation, compared with 4.6% previously. Annualized means the pace if the quarter’s growth continued for a year. These are initial estimates, but they show that the quarter as a whole was stronger than its final month’s household spending suggests.
For business development companies, which lend to businesses, the practical question is whether customers keep buying enough for borrowers to cover wages, supplies and interest. A squeeze on household budgets can make that harder for consumer-facing borrowers, although exposure varies and one month’s figures do not demonstrate rising loan losses. Property owners similarly depend on tenants earning enough to keep paying rent; national growth cannot establish the health of a particular tenant.
Our view is that the stronger quarter is welcome, but September’s loss of purchasing power deserves more attention than the headline spending increase. Yesterday’s Fed pause did not lower existing policy rates, so borrowers still need operating cash to carry their debt. We would become more constructive if inflation-adjusted household income and spending resumed growing together. Until then, stronger sales in dollars alone are a weak reason to expect better dividend support: what matters is the income left after costs and the cash borrowers actually pay.
Sources
- BEA: September personal income, spending, prices and revised August comparisons
- BEA: third-quarter advance GDP estimate and private domestic demand
- Federal Reserve: October 28 interest-rate decision
This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.