Economic Update for 9-26

This morning we saw the August release of Personal Income, which increased 0.4%. This matched the July gain and marked the third monthly increase since a 0.4% decline in May. The income growth contributed to the August Personal Spending increase of 0.6%, which was above the forecasted 0.5% and the strongest rise in five months. The nondurable goods sector was the primary contributor to the spending increase. Overall, these releases point to continued support from the consumer sector for economic growth.

The Federal Reserve’s preferred inflation measure was also released. The Personal Consumption Expenditures (PCE) Price Index for August rose 0.3%, following a 0.2% gain in July. On a trailing 12-month basis, the PCE index increased 2.7%, compared with 2.6% in June and July. The Core PCE Index (excluding food and energy) rose 0.2% in August, the same as July, bringing the year-over-year increase to 2.9%, also unchanged and in line with expectations. While inflation remains modestly above the Fed’s 2% target, it has shown notable improvement compared with levels a year ago. This could provide the Fed flexibility to consider additional rate cuts before year-end.

Yesterday, the final revision to second-quarter GDP was released. During the quarter, the economy grew at an annualized 3.8%, above the previous estimate of 3.3% and much stronger than the 0.6% decline in Q1. As with the other indicators, consumer spending played a major role in stronger growth. This was the strongest quarterly performance since September 2023.   It seems initial concerns surrounding recently introduced tariffs appear to have been overstated, and the economy is beginning to respond in a more normalized manner.

Despite generally positive data, a key near-term risk remains. Unless Congress passes a an agreed-to budget for the next fiscal year, or at least a short-term funding measure, the U.S. government will shut down on September 30. A shutdown would directly affect non-essential programs and workers, while essential services such as the military and national security would remain operational. Nevertheless, shutdowns typically cause disruptions across the economy, and financial markets rarely respond favorably, even when the interruptions are brief. Historically, as deadlines approach, Congress has often agreed on temporary measures to keep operations funded, and that remains the expected outcome. However, if no agreement is reached, key economic data releases would be delayed.

Have a good weekend and enjoy the early days of fall.