USA Outlook Update (Oct. 31, 2006): September consumer spending is strong! Media reports are wrong.

The personal consumption expenditure report of September 2006 has been published on the morning of October 30, 2006. The nominal personal consumption expenditure has grown 0.1% from the level of August. Leading financial channels on cable TV and leading financial newspapers all have reported that consumer spending is weakening, and thus have fanned the recession fear. However, such reports are misguided; they simply failed to study the official report carefully enough. The sluggish growth of the nominal value of personal consumption is due to the sharp drop of gasoline consumption; that in turn is the result of the sharp drop of crude oil and gasoline prices in September. Gasoline and oil consumptions fell by 45 billion dollars in the month, contributing a 0.4% drop in the personal consumption data. However, the real (inflation adjusted) gasoline consumption grew a few billion dollars. Such a development is positive to the economy. As the proof, the real personal consumption expenditure has grown 0.5% in September, translated to a growth rate of 5.3% in a year, thanks to sharply lower inflation index in the report. The drop of the inflation index in September is, of course, due to the sharp drop of gasoline prices. Combining with the weak result of August and a strong outcome of July, the three-month average growth rate of real personal consumption expenditure amounts to 3.0% a year, and is consistent with the third quarter GDP report.

Third quarter real GDP grew only 1.6%. The poor showing is due to very weak new home construction. However, September new home sales have rebounded sharply, though the average price of new home has dropped significantly and the inventory of unsold homes has shrunk substantially. This is a picture that the housing market is near the bottom. If the price of crude oil stays at the current level, resilient consumer spending will pull the fourth-quarter real GDP up by a significant amount. We may say that the soft-landing scenario remains intact.