US Consumer Spending Accelerates at Fastest Pace in 4 Years

Saul Trana stands in the check-out line as he shops at a Walmart store on February 19, 2015 in Miami, Florida. (Joe Raedle/Getty Images)

WASHINGTON—U.S. consumer spending rose for a seventh straight month in September, accelerating at the fastest pace in nearly four years.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 percent last month, as households bought more motor vehicles and spent more on health care. Data for August was revised higher to show spending advancing 0.5 percent instead of the previously reported 0.3 percent gain.

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

The data from the Commerce Department was included in the third-quarter gross domestic product report released on Oct. 26, which showed consumer spending accelerating at a 4.0 percent annualized rate, the fastest in nearly four years.

The economy grew at a 3.5 percent rate in the third quarter, a slowdown from the April-June period’s robust 4.2 percent pace. Economy growth during the Obama administration never topped 3 percent.

President Donald Trump’s economic agenda, spearheaded by the $1.5 trillion tax cut and rapid deregulation, has fueled robust growth in 2018. The unemployment rate is at the lowest level in decades as businesses maintain a positive outlook on the future.

“This is a truly exciting time for America,” Trump told a crowd at a rally on Oct. 23.

In addition, the World Economic Forum rates the United States as the most competitive economy in the world for the first time in years.

“We’re back. It’s a big statement,” Trump said.

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

The report also showed an 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. Higher interest rates and falling household wealth after a sharp stock-market selloff 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.”

Inflation Rising Steadily

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 next year.

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

Wage growth remains gradual, despite the unemployment rate being near a 49-year low of 3.7 percent. The savings rate fell to $975.7 billion last month, the lowest level since December 2017, from $1.0 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 percent this month.

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

“We expect consumption growth to moderate in the first half of 2019 as the boost from the tax cuts fades, but in the near-term, favorable 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 percent. Consumers also spent more on sporting goods. Outlays on services gained 0.3 percent, 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 percent after being flat in August.

That left the year-on-year increase in the so-called core PCE price index at 2.0 percent, for a fifth straight month.

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

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 U.S. 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 contributed to this report.