Consumer spending weak for second month, rising 0.1 per cent; incomes post strong gain

WASHINGTON – Consumer spending posted a modest increase for a second straight month in October, while personal income rebounded after a sluggish September.

Spending edged up 0.1 per cent after a similar tiny gain in September, the Commerce Department reported Wednesday.

Incomes jumped 0.4 per cent, double the rise in September. Wages and salaries climbed 0.6 per cent. That was the strongest wage gain in five months and a reflection of the big surge in hiring that occurred last month.

The second straight month of spending weakness could signal trouble, given that consumer spending accounts for 70 per cent of economic activity. However, economists are counting on the strong labour market to bolster the incomes needed to fuel spending in the months ahead.

In October, spending on durable goods such as cars was flat following a 0.5 per cent rise in September. Spending on nondurable goods such as food and clothing edged up 0.1 per cent following a big 1.1 per cent drop the previous month that in part reflected falling gasoline prices.

Spending on services such as haircuts and auto repairs rose 0.1 per cent after bigger gains of 0.4 per cent in August and September.

With the growth in incomes and a small rise in spending, the saving rate rose to 5.6 per cent of after-tax income in October, up from 5.3 per cent in September. It was the highest monthly savings level in nearly three years.

Paul Ashworth, chief U.S. economist at Capital Economics, said Friday’s data showed a “muted start” to the fourth quarter. But he described rise in the savings rate as encouraging because it means that households will have money to spend during the upcoming holiday shopping season.

“Even if labour market conditions weakened, that leaves plenty of scope for some solid gains in consumption over the holiday season,” Ashworth said.

The strong gain in wages and salaries came in a month when employers added 271,000 jobs, the biggest monthly increase this year. The strong job growth pushed the unemployment rate down to a seven-year low of 5 per cent.

The government on Tuesday reported that the overall economy, as measured by the gross domestic product, grew at an annual rate of 2.1 per cent in the July-September quarter, an upward revision from an initial estimate of 1.5 per cent GDP growth in the third quarter.

Economists are forecasting growth will accelerate to around 2.5 per cent in the fourth quarter, helped by stronger consumer spending.

Americans did boost online shopping and restaurant spending in October, but retail sales rose only 0.1 per cent during the month. Part of that weakness reflected falling gasoline prices.

There is a growing expectation that the Federal Reserve will decide at its Dec. 15-16 meeting to boost interest rates for the first time in seven years. The Fed has said it is prepared to move once it sees further improvements in the labour market and is confident that inflation will move back to its 2 per cent target over the next couple of years.