US consumer spending solid but incomes rise only marginally

US consumer spending rose for a seventh straight month in September, but income recorded its smallest gain in more than a year on moderate wage growth, suggesting the current pace of spending was unlikely to be sustained.

The report from the Commerce Department on Monday also showed the increase in income at the disposal of households was the smallest in 15 months and savings dropped to their lowest level since December last year.

There are signs the stimulus from the Trump administration’s $1.5 trillion tax cut package has peaked. Higher interest rates and falling household wealth after a sharp stock market sell-off are also casting a shadow on spending.

“It remains to be seen how long the spending spree can continue,” said Sung Won Sohn, chief economist at SS Economics in Los Angeles. “The stimulus from the tax cut has plateaued. Rising interest rates and volatile stock markets are having a psychological as well as a real effect.”

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Consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.4 per cent last month as households bought more motor vehicles and spent more on health care.

Revised

Data for August was revised up to show spending advancing 0.5 per cent instead of the previously reported 0.3 per cent gain.

Economists polled by Reuters had forecast consumer spending increasing 0.4 per cent in September. When adjusted for inflation, consumer spending rose 0.3 per cent. The so-called real consumer spending climbed 0.4 per cent in August.

The data was included in last Friday’s third-quarter gross domestic product report, which showed consumer spending accelerating at a 4 per cent annualised rate, the fastest in nearly four years.

The economy grew at a 3.5 per cent rate in the third quarter, a slowdown from the April-June period’s robust 4.2 per cent pace.

The dollar was trading higher against a basket of currencies, while US Treasury prices fell. Stocks on Wall Street rose, recouping some of last week’s sharp losses.

The rise in real consumer spending in September set it on a solid growth path heading into the fourth quarter. Economists expect consumer spending to slow in the first half of 2019.

Personal income rose 0.2 per cent last month, the smallest increase since June 2017, after gaining 0.4 per cent in August. Disposable income also increased 0.2 per cent. Wages climbed 0.2 per cent after jumping 0.5 per cent in August.

Wage growth remains gradual despite the unemployment rate being near a 49-year low of 3.7 per cent. The saving rate fell to $975.7 billion last month, the lowest level since December 2017, from $1 trillion in August.

Economists believe the stimulus from the tax cuts peaked in the third quarter. The stock market’s S&P 500 index has dropped nearly 8 per cent this month.

Multi-year highs

For now, the fundamentals for consumer spending are strong, with consumer confidence at multi-year highs.

“We expect consumption growth to moderate in first half of 2019 as the boost from the tax cuts fades, but in the near term favourable fundamentals are likely to translate into another strong holiday shopping season,” said Roiana Reid, an economist at Berenberg Capital Markets in New York.

In September, spending on goods surged 0.6 per cent. Consumers also spent more on sporting goods. Outlays on services gained 0.3 per cent, with spending on health care offsetting a decrease in spending at restaurants and on accommodation.

Prices continued to rise steadily in September. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose 0.2 per cent after being flat in August.

That left the year-on-year increase in the so-called core PCE price index at 2 per cent for a fifth straight month.

The core PCE index is the Federal Reserve’s preferred inflation measure. It hit the US central bank’s 2 per cent inflation target in March for the first time since April 2012.

Stock market drop

The Fed is expected to raise interest rates again in December despite tightening financial market conditions brought about by the stock market drop and a rise in US treasury yields.

The central bank raised rates in September for the third time this year and removed a reference to monetary policy remaining “accommodative” from its policy statement.

“The recent stability in core inflation will discourage the Fed from hiking rates next week, but the still above-potential rate of economic growth will spur a move in December,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. – Reuters