Vegetables for sale at a supermarket in Clearwater, Florida. Matthew Hoobin / CC0. Archive photo.
JBizNews Analysis
Two government reports released Thursday tell one story about the American economy that sounds like two. In one, the economy just sped up sharply. In the other, inflation-adjusted disposable personal income fell. Both are true – and understanding why explains a lot about the moment the country is in.
Start with the strong report. The economy grew at a 3.4% annual rate in the third quarter, up from 2.2% in the second, the Bureau of Economic Analysis estimated. Businesses invested, consumers spent, and the measure economists watch most closely – final sales to private domestic purchasers, the economy’s private engine – rose a brisk 4.9%.
Now the other report, released the same morning. In September, prices measured by the Fed’s preferred gauge rose 0.5% in a single month and 3.6% from a year earlier. Disposable personal income, after taxes and inflation, fell 0.3% in the month, the bureau reported. Families spent more anyway: spending rose 0.5%, outpacing income, and the saving rate sat at a modest 3.8%.
How can both reports be right? They measure different things. Growth counts everything the economy produces, and right now business investment – including computers and related equipment – is doing heavy lifting alongside consumer spending. Households, meanwhile, live on the other ledger: what comes in after taxes, minus what prices take away. A company buying server farms lifts GDP. It does not lift a family’s grocery budget.
There is genuine good news hidden in the growth report’s fine print: the PCE price index in the GDP report cooled sharply, to a 2.1% annual rate in the third quarter from 5.0% in the second, with the core measure at 2.5%. If that cooling held, the yearly inflation readings would follow it down over time. But September’s monthly figures moved the other way. Earlier that week, the Federal Reserve kept interest rates steady and called inflation elevated.
For households, the combined message is plain. The economy is not in trouble – far from it. The job market has held up, and businesses are investing. But September’s growth in nominal income did not keep up with prices, and the Fed has kept its benchmark rate at 3.75%-4% while it waits for more information on inflation.
Two scoreboards, one economy. Which one improves first is the question that decides when ordinary families start feeling the recovery the growth numbers keep describing.
JBizNews Desk | Washington
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