By Lucia Mutikani
WASHINGTON (Reuters) -U.S. consumer spending increased more than expected in September as households boosted purchases of motor vehicles and traveled, keeping spending on a higher growth path heading into what economists expect will be a challenging fourth quarter.
The report from the Commerce Department on Friday showed monthly underlying inflation picking up last month, but it was largely driven by housing costs. With spending seen cooling off in early 2024 as excess savings accumulated during the COVID-19 pandemic run out, most economists believe the Federal Reserve is done raising interest rates, though risks of a rate hike remain.
“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.”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged 0.7% last month, the Commerce Department’s Bureau of Economic Analysis reported. Data for August was unrevised to show spending rising 0.4%. Economists polled by Reuters had forecast spending gaining 0.5%.
The increase in spending last month was spread across goods and services. Outlays on goods increased 0.7%, led by prescription medication, new light trucks, food and beverages as well as recreational goods and vehicles. Spending on services
shot up 0.8%, boosted by international travel, housing and utilities, healthcare and airline transportation services.
The data was included in the advance gross domestic product report for the third quarter published on Thursday, which showed consumer spending accelerating sharply, contributing to the fastest pace of economic growth in nearly two years.
Adjusting for inflation, consumer spending rose 0.4% in September after ticking up 0.1% in August, a strong hand-off from the April-June quarter that bodes well for spending in the fourth quarter.
But with the spurt in spending last month appearing to have been funded from savings, momentum could slow. Personal income rose 0.3% after gaining 0.4% in August. Wages increased 0.4% after advancing 0.5% in the prior month. Millions of Americans resumed student loan repayments in October.
The saving rate dropped to 3.4% from 4.0% in August. Though excess savings remain ample, they are mostly concentrated among the high-income households, according to economists. Low income households are believed to have exhausted their pandemic savings, leaving most to rely on debt to fund purchases.
Credit card balances are rising, but most economists do not believe they are at levels that could cause alarm, and argue that the labor market remains the key factor for spending.
U.S. stocks opened higher. The dollar fell against a basket of currencies. U.S. Treasury prices were mixed.
WARMER MONTHLY INFLATION
Monthly inflation remained warm in September. The personal consumption expenditures (PCE) price index gained 0.4% after increasing by the same margin in August. Food prices climbed
0.3% and energy prices increased 1.7%.
In the 12 months through September, the PCE price index advanced 3.4%, matching August’s rise.
Excluding the volatile food and energy components, the PCE price index rose 0.3%, after edging up 0.1% in August. The so-called core PCE price index rose 3.7% on a year-on-year basis in September. That was the smallest gain since May 2021 and followed a 3.8% increase in August.
Stripping out housing, the core PCE rose by a moderate 0.2%. The so-called super core PCE, which is PCE services excluding energy and housing was stronger, increasing 0.4% last month after nudging up 0.1% in August.
The U.S. central bank tracks the PCE price indexes for its 2% inflation target. Policymakers are watching the super core PCE to try and gauge their progress in combating inflation.
The U.S. central bank is expected to leave interest rates unchanged next Wednesday following a recent surge in U.S. Treasury yields and stock market sell-off, which have tightened financial conditions.
Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25%-5.50% range.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)