Stronger GDP Raises the Stakes for Winning Consumer Dollars

Go figure. Inflation picked up in August. Real disposable income didn’t move much. Consumers responded by spending substantially more. The trends are more revealing about household finances than the headline 2.2% increase in second-quarter gross domestic product.

The Bureau of Economic Analysis’ third estimate released Wednesday (Sept. 30) revised second-quarter GDP growth upwards by 0.7 percentage point, with stronger consumer spending among the key drivers. Consumer spending was revised higher across both goods and services, with recreation and other services contributing to the services revision and recreational goods and vehicles, particularly information-processing equipment, helping lift the goods segment.

Inflation ran higher alongside that growth. The personal consumption expenditures (PCE) price index rose at a 5.0% annualized rate during the second quarter, up from 4.2% in the first quarter. Core PCE inflation moderated to a 3.3% annualized rate from 3.9%.

BEA’s separate Personal Income and Outlays report showed PCE prices rising 0.3% in August, up from 0.1% in July. Prices were 3.4% higher than a year earlier, while core prices were up 3.0%.

Spending accelerated much faster. Nominal PCE rose 0.9% in August after 0.1% in July. But real disposable personal income moved the other way, slowing from 0.3% growth in July to zero in August.

In one month, then, consumers sharply accelerated the amount they actually consumed without a corresponding increase in their inflation-adjusted disposable income. Spending alone is an incomplete measure of household financial health.

PYMNTS Intelligence’s “Inside the Cutback Economy” research supplies some of the insight that GDP and PCE can’t.

The triage is apparent in the data. We found 34% of U.S. adults were “reactive” consumers whose spending and savings had fallen. Another 21% were “proactive” consumers who were taking measures such as adding income, negotiating bills or using buy now, pay later (BNPL) options even as their spending declined. Forty-five percent were “balanced,” holding spending flat or increasing it with relatively little coping activity.

Even within the group under the greatest pressure, however, “cutting back” didn’t mean eliminating discretionary purchases.

Among reactive consumers facing daily living pressure, 73% didn’t identify entertainment as a challenge, 59% continued dining out or ordering food delivery and 71% maintained pet-care spending. Clothing and personal care were less protected, particularly among younger consumers.

Groceries show the other side of the household budget. Between 88% and 94% of reactive consumers facing daily living pressure identified groceries as a challenge, regardless of generation.

The August government data indicate that consumers bought considerably more goods and services in real terms during a month when their real disposable income didn’t rise.

The read across is one where the strength in GDP and consumer spending is being produced by households with very different amounts of financial room — and very different ideas about which purchases they’ll give up first.

One measure to watch is how much room households retain after spending. Personal saving totaled $990.2 billion in August, putting the personal saving rate at 4.1% of disposable income, down from previously published 4.8% rates in July. If consumption continues to advance faster than household income, changes in saving will help show how consumers are accommodating the difference. PYMNTS Intelligence found the household cushion was already thinning in September: 51.8% of consumers said their savings would cover three months or less if their income stopped, up 2.4 percentage points from August and 4 percentage points since April.