U.S. consumer spending increased in September as consumers increased their vacation and auto expenditures, continuing the upward trend in spending that began in the third quarter and continued into the fourth.

In light of rising prices for services like housing, the Commerce Department’s report on Friday revealed a stronger-than-expected increase in spending, which was followed by heightened monthly inflation readings. However, early in 2024, spending is expected to slow down as the pandemic’s excess reserves begin to run out, which will lead economists to believe that the Federal Reserve is finished hiking interest rates.

However, there is still a chance of a rate increase.

“U.S. consumers still had some gas left in the tank last month that risks carrying into the current quarter,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

“While we still expect spending and the economy to downshift sharply in the fourth quarter, the risk is that both will keep running hotter than the Fed needs to subdue still-stubborn services inflation.”

Over two-thirds of all economic activity in the United States is generated by consumer spending, which increased 0.7% last month following an unrevised 0.4% increase in August, according to data from the Commerce Department’s Bureau of Economic Analysis. Reuters polled economists, who predicted a 0.5% increase in spending.

Spending increased on a variety of goods and services. Prescription drugs, new light trucks, food and drink, as well as recreational items and automobiles, were the main drivers of the 0.7% increase in goods expenditures. Travel abroad, housing and utilities, healthcare, and airline transportation services drove a 0.8% increase in service spending.

The information was part of the preliminary third-quarter GDP report, which was released on Thursday. It revealed a strong increase in consumer spending, which helped the economy grow at its quickest rate in almost two years.

After increasing by 0.1% in August, consumer expenditure increased by a robust 0.4% in September after accounting for inflation. This strong performance from the April–June quarter is encouraging for both consumption and overall economic development in the fourth quarter.

But growth isn’t expected to equal the spectacular results of the previous quarter. With the savings rate falling to 3.4% from 4.0% in August, consumers are drawing less from their accounts.

August personal income increased by 0.4%, although only by 0.3%. Household disposable income decreased for a third consecutive month after taking taxes and inflation into account.

“That is not sustainable,” said James Knightley, chief international economist at ING in New York. “Savings are finite and are being exhausted at a rapid rate, with various estimates suggesting that excess savings accrued during the pandemic could be exhausted in the first half of next year.”

Economists claim that high-income households are the main holders of excess savings, with low-income households having long since used up their stockpile. The majority of consumers use debt to finance their purchases. Many of these individuals are probably in a bad financial situation because they have school debts that they started repaying this month.

However, some economists argue that consumers can still afford to pay their debts because of a robust labour market, casting doubt on the threat posed by rising credit card balances. After rising by 0.5% the previous month, wages increased by 0.4% this month.

“U.S. households are healthy financially relative to past cycles,” said Chris Low, chief economist at FHN Financial in New York. “Debt levels are low, savings are still pretty high and income is solid. There is nothing compelling in the data suggesting a spending slowdown is inevitable.”

Wall Street stocks were rising in value. In relation to a currency basket, the dollar declined. The price of US Treasury notes varied.

September had continued warm monthly inflation. Following a 0.4% increase in August, the price index for personal consumption expenditures (PCE) increased by the same amount. costs for food went up 0.3%, while costs for energy went up 1.7%.

The PCE price index increased 3.4% in the year ending in September, which was in line with August’s increase.

After increasing by 0.1% in August, the PCE price index increased by 0.3% after the erratic food and energy components were taken out. Housing services now cost 0.5% more.

According to experts, monthly inflation readings of 0.2% on a sustainable basis are required to return inflation to the 2% target set by the US central bank.

After rising 3.8% in August, the so-called core PCE price index increased 3.7% year over year in September, the least amount of growth since May 2021.

Excluding housing, the core PCE price index experienced a modest 0.2% increase. The so-called super core, or PCE services other than housing and energy, increased by 0.4%, following a 0.1% increase in August. In September, the super core PCE price index increased 4.3% on an annual basis.

For monetary policy purposes, the Fed monitors the PCE price indices. To try and assess how well they are doing at containing inflation, policymakers are keeping an eye on the super core PCE price index. Next Wednesday, the Fed is anticipated to maintain current interest rates due to the tightening financial conditions brought on by the recent spike in U.S. Treasury yields and the sell-off in stocks.

The Fed has increased its policy rate by 525 basis points since March 2022, bringing it to the current range of 5.25%–5.50%.

“There is more work to be done to sustainably lower inflation towards the 2% target,” said Pooja Sriram, an economist at Barclays in New York.

(Adapted from Reuters.com)

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