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SEPTEMBER SPENDING OUTPACES INCOME By Mark Lieberman, Economist for the Five Star Institute Consumer spending rose $87.9 billion, 0.8 percent, in September, twice the 0.4 percent growth in personal income, $48.1 billion, the Bureau of Economic Analysis reported. While the increase in income matched economist expectations, the increase in spending was higher than the forecast. The personal savings rate fell to 3.3 percent, the lowest level since last November. It was the third straight month spending grew faster than income, confirming the recent report showing solid growth in Gross Domestic Product from 1.3 percent in the second quarter to 2 percent in the third. At 2 percent, the economy is still growing slowly, however. The monthly income-spending report showed signs of an improving labor market as wages improved $20.8 billion in September, the strongest growth in three months. Most of the wage growth—16.6 billion—came in the service sector. Disposable personal income—essentially after-tax income—rose $43.0 billion in September, the strongest month-month improvement since March when it grew $55.0 billion. The month-month drop in the personal savings rate was the third month as personal savings itself fell to $395 billion, the lowest level since November. With spending exceeding income, borrowing increased and as a result, despite continuing low interest rates, personal interest payments (non-mortgage interest) rose to $181.5 billion in September from $176.6 in August. Government transfer payments—Social Security, Medicare, and unemployment insurance—rose $12.7 billion in September after falling $1.8 billion in August. Social Security payments rose $14 billion in September due to calendar configuration. Unemployment insurance payment fell $1.8 billion in September, the ninth consecutive month-month decline, due to a combination of government cuts and an improving labor market. The increase in personal consumption was primarily due to higher spending on goods, up $56.6 billion, while spending on services rose $43.1 billion. The increased spending on goods was heavily weighted to non-durable goods, $43.1 billion compared with $13.4 billion for durable goods, suggesting consumers might be reluctant to spend on higher ticket items, which are often financed through borrowing. The Personal Consumption Expenditure (PCE) Price—often considered the Federal Reserve's favored measure of inflation—rose 0.4 points in September, matching August for the sharpest increase of the year, and is up 1.7 for the year, the strongest year-year growth since April's 1.9 percent, but within the Fed's target range. The "core" PCE Index—excluding food and energy—rose 0.1 point in September as it did in August and was up 1.7 percent in the last year, slightly faster than the August annual increase of 1.6 percent. KNOW THIS The homeowner vacancy rate fell to 1.9% at the end of Q3 to hit a seven-year low—a sign the economy has worked off most of the excess construction of the boom years, according to economists with IHS Global Insight. 40 FITCH EXAMINES REO-TO-RENTAL CHALLENGES The shadow inventory that previously darkened the industry's outlook is fading. In fact, we are beginning to see the sunlight on the horizon, according to market data from CoreLogic. In July, shadow inventory—unlisted homes seriously delinquent, in foreclosure, or held as REOs—declined 10.2 percent year-over-year, falling to 2.3 million units, CoreLogic reported last month. "This is yet another hopeful sign that the housing market is slowly healing," said Anand Nallathambi, president and CEO of CoreLogic. Last July's 2.6-million-home shadow inventory was eerily close to the level recorded two years prior in May 2009. Now, the heavy shadows are lifting. The current shadow inventory is valued at $382 billion, down from $397 billion in July 2011, and equates to a six-month supply, according to CoreLogic. The analytics firm also reports the rate of distressed sales taking homes out of the shadows is close to matching the rate of newly seriously delinquent homes falling into the shadows. Seriously delinquent homes—those 90 or more days delinquent—are the most common type of home in today's shadow inventory, making up 1 million of the current 2.3-millionhome total. About 900,000 homes are currently in foreclosure, and another 345,000 are in REO. Despite fading shadows nationally, some states continue to struggle with long foreclosure timelines. "While a lower outflow of distressed sales helps alleviate downward home price pressure, long foreclosure timelines in some parts of the country cause these pools of shadow inventory to remain in limbo for an extended period of time," said Mark Fleming, chief economist at CoreLogic. Forty-five percent of the industry's shadow inventory is concentrated in five states—Florida, California, Illinois, New York, and New Jersey. STAT INSIGHT 3,390,350 Number of calls taken at 888.995.HOPE since hotline was launched in December 2007. Source: Homeownership Preservation Foundation

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