Today's report on income and spending for September continued the recent trend of stagnant income accompanied by increased spending (3 straight months). Disposable income adjusted for inflation was flat in September (very small decline), which follows a decline in August and a small increase in July. During the last 3 months, real disposable income declined at an annualized rate of 0.8% (though it's risen by 1.9% over the last 12 months). Meanwhile, personal consumption rose by 2% for the quarter. Given the declining income and rising consumption, the savings rate fell to 3.3%, down from 4.4% in June 2012 (the lowest since November 2011). If it drops a little more, it will be the lowest since late 2007. On positive note, both overall and core inflation are running at a 1.7% rate over the last year (though inflation spiked somewhat in September due to increased energy prices, which will be reversed in the October report).
The takeaway from this report is similar to previous reports. How long can consumer spending increase when it's not supported by increases in disposable income? That brings up the issue of the fiscal cliff. As of now, the consensus is that the payroll tax cut will be allowed to lapse, resulting in a 2% tax increase on earnings, thus reducing disposable income as we enter 2013. Combine this with a low savings rate and things don't look good for consumer spending in the first quarter of 2013.