Payden & Rygel: Latest consumer spending numbers, inflation, labor market

September 29, 2025

Interview with Jeffrey Cleveland, Chief Economist at Payden & Rygel

Personal spending rising more than expected, tame but sticky inflation, all in the context of that stronger than expected second quarter GDP read that we got yesterday. Is the market right to price in rate cuts in October and December?

'We think we’re still on track for rate cuts. The reason why is inflation.  We expect inflation to moderate a bit through year end. So, that core PCE figure that you mentioned this morning for August, it was up just .2, which keeps us on track. We think by year end, core PCE on a year-on-year basis will be 2.6, so we will moderate a bit from the current reading of 2.9. So I think that alone keeps the door open for rate cuts, and I think it’s good news for markets because it would be rate cuts happening not because of some economic calamity, but because inflation continues to moderate. So more of your soft landing vibes rather than your recession vibes would be the story there. And I think, yes, the consumer spending numbers this morning and the data that we saw yesterday for Q2, we see a very resilient consumer, despite all the shocks that have been thrown its way so far this year. So, good news overall.

If you look at the data in a little more detail, you see that goods were a bit of a drag on the month, so maybe the tariff story has already played out, maybe the tariffs are not feeding through into consumer prices as much. I think there’s a few different stories you could tell there, but the — the worst fears or the big fears on a tariff-driven inflation really haven’t panned out. And then going forward, we’re optimistic that we’ll get help in two areas which will help inflation moderate, so on non-housing services, those prices should continue to cool off along with the labor market. And then housing — housing has been a big contributor to core inflation the last few years. It’s sticky metric in the government data, and we think that will continue to fade out over the next 12 months. I think we’re going to see that in the CPI, but also in the PCE. And so overall, that should help bring core inflation lower, yeah, on the next 6-to-12-month basis. So we're inflation doves, if you will.'

When it comes to consumer sentiment, and there are signs of perhaps not everything is well. The latest University of Michigan sentiment declining to 55.1 — and I know we’re talking about really small amounts here, but [US] consumers don’t necessarily feel more encouraged as of late. How do you balance that with what we’re seeing in the macro data?

'I’m not surprised, given all the headlines that consumers have to face, right? So, you’ve got everything from tariffs to potential layoffs, weakness in the labor market, all kinds of economic policy shifts, backtracking. So things of that nature, I think, weigh on the consumer, but we always say at Payden, 'Watch what the consumer does, not what the consumer says.' So, consumer sentiment surveys are not that valuable for us. And I think that’s played out through Q2 and data we’ve seen and into August and consumer spending as well. The consumer continues to spend.

Why might that be? Well, you know, when we look at aggregate income growth, we always talk about that, it continues to grow, in nominal terms, like at a 4 to 5% clip. So the bottom line is, if the consumer has income growth, they will — the American consumer will find a way to spend. And that’s been true, despite all the shocks that I think are weighing on sentiment indicators.

I think the labor market has clearly softened. I mean, when we look at — the payroll survey to us bond market nerds is one of the most, you know, obviously high-frequency, but high-quality data points that we can look at. So the fact that the three-month average of non-farm payrolls has slowed to 29,000, that really gets our attention. It’s a concern. Rarely do you slow, you know, that much outside of a recession. It’s happened a couple times, mid-60s and mid-1990s. So maybe this is a mid-1990s scenario and we’ll see things pick back up. Other similarities would be the tech investment that we are seeing. In our chart of the week this week, we look at tech as a share of growth, and it's about 40% of growth in the GDP accounts in the last four quarters. So that’s keeping the story going, despite our concerns on the labor market side.'