Highlights
The August personal income report looks good on the income side but is worrisome on the spending side. But as expected, we got good news on the inflation front. Personal income in August rebounded 0.5 percent, following a 0.6 percent drop in July. The August gain beat the consensus forecast for a 0.2 percent increase. Within personal income, the wages and salaries component posted a 0.4 percent increase in August, after advancing 0.3 percent the previous month.

Spending was flat overall but there was large divergence by components. Personal consumption expenditures in August were unchanged, following a 0.1 percent uptick in July. The market had forecast a rise of 0.2 percent for personal spending. For the latest month, a spike in auto sales led to a 1.4 percent jump in durables PCEs. Weak gasoline sales pulled down nondurables, which fell 0.6 percent. Services rose a mere 0.1 percent. On the inflation front, the headline PCE price finally eased on lower energy costs. The overall index slowed to no change, following hefty gains in July and June of 0.6 percent and 0.8 percent, respectively. The core PCE price index eased to 0.2 percent from 0.3 percent in July. The market had projected a core increase of 0.2 percent for the latest month.

Year on year, personal income growth rose to up 4.6 percent from up 4.5 percent in July. Headline PCE inflation slowed to up 4.5 percent from up 4.6 percent the month before. Core PCE inflation firmed to 2.6 percent from 2.5 percent in June. Both headline and core PCE price inflation remain above the Fed's implicit inflation target range of 1-1/2 to 2 percent annualized.

The August personal income report points to weak third quarter GDP. However, markets will be focusing on the meaning of Citigroup's buyout of Wachovia and also on hoped for passage of the Treasury's rescue plan for the financial system.