U.S. Personal Income & Outlays – Sep 2018

Released Monday, October 29, 2018

Download PDF version herePersonal Income: +0.2% month-over-month (Cons: +0.4%), +4.4% year-over-year
Personal Consumption Expenditures: +0.4% month-over-month (Cons: +0.4%), +5.0% year-over-year
Core PCE Price Index: +0.2% month-over-month (Cons: +0.1%), +2.0% year-over-year
Savings Rate: 6.2%, -0.4 ppt year-over-year

Quick Take:
Personal income rose +0.2% month-over-month in September, below economists’ estimates. Personal income rose a revised +0.4% in August, up from +0.3% originally. Year-over-year personal income growth was +4.4%, down from +4.7% growth in August. Wages and salaries, which make up ≈50% of personal income, grew +4.6% year-over-year in September, above the recovery average of +3.9%.

Nominal personal consumption expenditures rose +0.4% month-over-month in September, in line with economists’ expectations, while August’s monthly gain was revised to +0.5% from +0.3% prior. Nominal personal consumption growth in September was broad-based, as services spending and goods spending rose +0.3% and +0.6% month-over-month, respectively.

Personal spending growth outpaced income growth in September, dropping the savings rate to 6.2% from 6.4% in August. Personal consumption was the primary driver of real GDP growth in third quarter, as consumer strength continues to be supported by competitive labor markets and solid gains in wages and salaries.

On the inflation side, month-over-month growth for the core PCE price index was +0.2% in September, slightly above economists’ estimates. Year-over-year growth was +2.0% for the sixth consecutive month in September. On a 6-month annualized basis, core PCE prices were up +1.7%. Housing and utilities inflation, which represents the largest component of core inflation, increased +3.0% year-over-year as of September and was up +2.6% on a 6-month annualized basis.

Notable Data:
Services spending, which makes up approximately two-thirds of personal spending, rose +5.2% year-over-year in September. Durable goods spending and nondurable goods spending each rose +4.7% year-over-year.

Real disposable income, an indicator of purchasing power, was up +0.1% month-over-month in September and rose +2.9% year-over-year, down from +3.0% growth in August. Real disposable income has grown above +2.5% year-over-year for 17 consecutive months.

Real personal consumption rose +0.3% month-over-month in September after rising +0.4% in August. On a year-over-year basis, real personal consumption rose +3.0%, down from the recent high of +3.2% growth in August.


U.S. Real GDP – Q3 2018 (Advance Estimate)

Released Friday, October 26, 2018

Download PDF version hereReal GDP: +3.5% quarter-over-quarter (annualized rate) (Cons: +3.3%), +3.0% year-over-year
Real Final Sales: +1.4% quarter-over-quarter (annualized rate), +3.0% year-over-year

Quick Take:
The advance estimate of Q3 real GDP growth was 3.5%, higher than economists’ estimates for 3.3% growth.  Q3 2018 represented the sixth consecutive quarter in which quarterly growth exceeded 2.0%, the longest such period of this cycle. On a year-over-year basis, real GDP grew 3.0% in Q3, the fastest pace of growth since Q2 2015. Growth in Q3 was powered by personal consumption, which contributed 2.7 percentage points (ppt) to quarter-over-quarter growth, and inventories, which contributed 2.1 ppt.

Real Final Sales, which excludes the inventories component and is a less volatile version of economic growth, grew 1.4% in Q3, the lowest pace of quarter-over-quarter growth in 7 quarters.

Real GDP growth in Q3 and Q2 represented the strongest back-to-back quarterly GDP readings in four years despite volatile fluctuations in inventories and net exports that had offsetting impacts to growth. Looking past the noise, it was broad-based personal consumption that drove economic growth in both quarters, as goods spending and services spending each contributed over 1.0 ppt to quarterly real GDP growth in both Q3 and Q2. Spending on food services, clothing, home furnishings, and recreational goods has been particularly strong. Spending on motor vehicles and parts, which was a significant drag on real GDP in Q1, increased 3.8% in Q3 after rising 6.4% in Q2.

Despite the swings in trade and inventories over the past two quarters, real GDP remains on the moderate growth track seen throughout much of the expansion. Q3 year-over-year real GDP growth of 3.0% was slightly above the average annual growth of 2.2% since the start of 2010, but is not higher than previous readings seen during this expansion.

Notable Data:
PCE growth was 4.0% quarter-over-quarter in Q3, up from 3.8% growth in Q2 2018. Both goods consumption (+5.8% quarter-over-quarter) and services consumption (+3.2% quarter-over-quarter) accelerated in Q3. PCE contributed +2.7 ppt to Q3 real GDP growth, the highest since Q4 2014. Looking forward, the outlook for personal consumption (~70% of the economy) remains healthy given gains in personal income and the tightness in the labor market.

Fixed Investment was a neutral contributor to Q3 real GDP growth, down from a +1.1 ppt contribution in Q2. Investment in intellectual property contributed +0.35 ppt to growth, which was offset by declines in structure and residential investment.

Government consumption contributed 0.56 ppt to real GDP growth in Q3, up from 0.43 ppt in Q2.

The 3.0% year-over-year gain in real GDP was boosted by growth in inventories by +0.1 percentage points.

Select Opportunities at Home and Abroad – Q3 2018

We see ongoing investment opportunities in the U.S., tied to its economic leadership. We also see new opportunities in Asia, where equity underperformance has shifted the region’s risk and return outlook. While markets always face uncertainties, economic and market fundamentals appear stable.


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Global Balanced Portfolio Outlook, Positioning, and Attribution as of 9/30/2018


  • The global economic outlook remains positive, bolstered by a trend of moderate economic growth in the U.S., where Q3 data reaffirmed that the U.S. consumer remains healthy.
  • European data this year has pointed to softer economic activity.
  • Japan’s personal income and business CapEx have improved and Asian equity valuations have declined markedly versus the U.S. Asia, in particular, stand to benefit if global trade tensions ease.
  • Modest inflationary pressures and a normalization of real interest rates are supporting nominal interest rates.

Portfolio Positioning

  • We favor U.S. equity sectors with both cyclical and secular tailwinds, like the new Communication Services Sector, while avoiding U.S. sectors with high economic or interest rate-sensitivity.
  • Adjustments within the strategy’s U.S. equity allocation in Q3 tied to the creation of the Communication Services Sector did not reflect a change in our outlook or underlying exposures.
  • While still underweight international equities, we modestly increased developed and emerging Asia exposure in Q3 as falling valuations this year improved the region’s risk/reward profile in our view.
  • Emphasis of short-duration fixed income securities and avoidance of U.S. Utilities and Real Estate equities limit interest rate risk.

Q3 Attribution

Positive Contributors:

• U.S. Health Care Equities

• Emerging Asia Equities
• U.S. Treasury Securities

Negative Contributors:

• U.S. Consumer Staples Equities

• U.S. Industrials Equities

Attribution Analysis is relative to the Global Balanced benchmark and was current as of the date specified in this presentation. A complete attribution report is available upon request. The most recent complete presentation can be viewed here.
Attribution for Q3 2018 is based on sector categorizations in place prior to the end of September 2018. At the end of September 2018, Standard & Poor’s and MSCI reorganized their Global Industry Classification Standard (GICS) to create a new “Communication Services Sector.” This new sector combined the former Telecommunication Services Sector with media, advertising, and entertainment companies taken from the Consumer Discretionary Sector, and with certain internet and entertainment software companies taken from the Information Technology Sector.
Any portfolio characteristics, including position sizes and sector allocations among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature and risk from those shown. The investment processes, research processes or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified.
Holdings, Sector Weightings and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ Global Balanced holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary. Upon request, WestEnd Advisors will provide a list of all recommendations for the prior year.