In September, U.S. consumer spending experienced a significant surge, driven by increased purchases of motor vehicles and travel, maintaining strong momentum as the fourth quarter commences.
The Commerce Department reported an unexpectedly robust increase in spending, accompanied by elevated monthly inflation figures, primarily due to higher costs in sectors such as housing services. Despite this, economists anticipate spending may cool off in early 2024, as accumulated pandemic savings are depleted, leading many to believe the Federal Reserve has concluded its interest rate hikes.
Nevertheless, the possibility of a rate hike remains.
Sal Guatieri, a senior economist at BMO Capital Markets, noted, «U.S. consumers still exhibited robust spending last month, which could carry into the current quarter. While we expect spending and the economy to potentially slow down in the fourth quarter, there’s a risk that both may outpace the Fed’s efforts to curb persistent services inflation.»
Consumer spending, a pivotal driver of the U.S. economy, surged by 0.7% in September, following an unrevised 0.4% rise in August, as reported by the Commerce Department’s Bureau of Economic Analysis. Economists polled by Reuters had anticipated a 0.5% increase.
This uptick in spending encompassed both goods and services. Goods spending rose by 0.7%, with notable contributions from prescription medications, new light trucks, food and beverages, and recreational goods and vehicles. Spending on services witnessed an even sharper rise of 0.8%, boosted by international travel, housing and utilities, healthcare, and airline transportation services.
This data was incorporated in the advance gross domestic product (GDP) report for the third quarter, published on Thursday, revealing a robust acceleration in consumer spending, contributing to the fastest economic growth rate in nearly two years.
When adjusted for inflation, consumer spending demonstrated a solid 0.4% increase in September, a promising continuation of the 0.1% uptick in August. This trend bodes well for consumption and overall economic growth in the fourth quarter.
However, it’s unlikely that this growth will match the blockbuster performance of the previous quarter, as consumers have been dipping into their savings, causing the savings rate to decline from 4.0% in August to 3.4%.
Personal income saw a 0.3% increase in September, following a 0.4% gain in August. After factoring in inflation and taxes, disposable income for households dropped for a third consecutive month.
James Knightley, the chief international economist at ING in New York, voiced concern, stating, «Savings are finite and are being depleted rapidly. Various estimates suggest that excess savings accrued during the pandemic may run out in the first half of next year.»
While most excess savings are concentrated among high-income households, lower-income households are believed to have already spent their reserves. Some consumers may be resorting to debt to finance their purchases, possibly due to the resumption of student loan repayments, which could create financial challenges for them.
However, not all economists view rising credit card balances as a major threat. They argue that consumers can still manage their debt obligations, thanks to a robust labor market. Wages increased by 0.4% after a 0.5% rise in the previous month.
Chris Low, the chief economist at FHN Financial in New York, highlighted the overall financial health of U.S. households, stating, «U.S. households are in a sound financial position compared to past cycles. Debt levels are low, savings remain relatively high, and income is stable. The data does not suggest an inevitable slowdown in spending.»
On Wall Street, stocks traded higher, while the dollar weakened against a basket of currencies. U.S. Treasury prices showed mixed movements.
Monthly inflation remained robust in September, with the personal consumption expenditures (PCE) price index increasing by 0.4%, matching the August increase. Food prices rose by 0.3%, and energy prices increased by 1.7%.
Over the 12 months leading up to September, the PCE price index saw a 3.4% increase, matching the rise in August.
Excluding the volatile food and energy components, the core PCE price index grew by 0.3%, after a 0.1% uptick in August. Housing services costs also increased by 0.5%.
Economists assert that monthly inflation readings of 0.2% on a sustained basis are necessary to bring inflation back in line with the U.S. central bank’s 2% target. In September, the core PCE price index reported a 3.7% year-on-year increase, the smallest gain since May 2021, following a 3.8% increase in August.
When housing is excluded, the core PCE price index exhibited a milder increase of 0.2%. The so-called super core, which excludes energy and housing from PCE services, saw a stronger increase of 0.4%, after a 0.1% increase in August. The super core PCE price index reported a 4.3% year-on-year increase in September.
The Federal Reserve closely monitors the PCE price indexes in shaping its monetary policy. Policymakers are particularly focused on the super core PCE price index to assess their progress in tackling inflation. In the upcoming week, the Fed is expected to keep interest rates unchanged, following a recent surge in U.S. Treasury yields and a stock market sell-off, which have led to tighter financial conditions.
Since March 2022, the Fed has raised its policy rate by 525 basis points, reaching the current 5.25%-5.50% range. Pooja Sriram, an economist at Barclays in New York, highlighted the work that remains to be done in achieving sustainable inflation levels consistent with the Fed’s 2% target, stating, «There is more work to be done to sustainably lower inflation towards the 2% target.
