September saw a sharp increase in US spending as families increased their auto purchases and vacation, keeping on the trend of stronger spending growth into the next fourth quarter.
Amidst rising expenses for housing and other services, the Commerce Department's report on Friday revealed a higher-than-anticipated rise in spending, which was matched by higher monthly inflation readings. However, as the extra savings from the epidemic begin to run down, spending is predicted to slow down in early 2024, leading economists to believe that the Federal Reserve is finished hiking interest rates.
Yet there is still a chance of a rate increase.
Sal Guatieri, senior economist of Toronto's BMO Capital Markets, stated that although we still anticipate a significant slowdown in both the economy and spending in the last quarter of the year, there's a chance that neither will slow down as quickly as the Fed would want in order to control the persistently high rate of service inflation.
More than two-thirds of economic activity throughout the US is generated by consumer spending, which increased 0.7% last month following an unrevised 0.4% rise in August, according to data from the Commerce Department's Bureau of Economic Analysis. Economists have estimated a 0.5% rise in spending before.
Spending went up on a range of goods and services. Prescription medications, food and drink, new light trucks, recreational goods, and cars were the primary contributors to the 0.7% increase in goods spending.
Driven by increases in healthcare, services spending rose by 0.8%,, housing and utilities, overseas travel, and aircraft transportation services.
The data was part of the third-quarter advance gross domestic product report, which was released on Thursday. The study showed that consumer spending was growing with a significant acceleration, at its fastest rate in nearly two years.
With inflation taken into account, consumer spending rose by a healthy 0.4% in September, following a 0.1% increase in August. This good performance is encouraging for both consumption and overall economic development in the upcoming quarter.
But growth isn't expected to equal the spectacular results of the last quarter. With the savings rate falling to 3.4% from 4.0% in August, consumers are putting away less money.
After growing by 0.4% in August, personal income increased by 0.3%. After deducting taxes and inflation, household disposable income decreased for a third consecutive month.
Economists claim that high-income families are the main holders of excess savings, with families with low incomes having long since used up their stash. The majority of consumers use debt to finance their purchases. Many of these individuals are probably in a bad financial situation because they have school debts that they started repaying this month.
Rising credit card balances may be concerning, but some economists contend that consumers are still able to pay their bills because of a strong job market. This month's pay increase was 0.4%, following a 0.5% increase last month.
Chris Low, the chief economist of FHN Financial in New York, stated that American families are in a stronger financial position than they were in previous cycles. There is little debt, a sizable amount of savings, and a stable income. The statistics do not provide any strong indication that there will be a decrease in spending.
Wall Street stocks were rising in value. The dollar declined against a basket of currencies. The prices of US Treasury were mixed.
Warmer monthly inflation
September saw warmer monthly inflation. After rising 0.4% in August, the personal consumption expenditures (PCE) price index increased the same amount. The price of food increased by 0.3%, while the cost of energy went up by 1.7%.
The PCE price index increased by 3.4% in the 12 months ending in September, which was in line with August's increase.
After barely increasing by 0.1% in August, the PCE price index increased by 0.3% if the volatile food and energy components were excluded. The price of housing services saw a 0.5% rise.
Economists estimate that in order to return inflation to the 2% target set by the US central bank, monthly inflation readings of 0.2% on a sustained basis are required. Following a 3.8% increase in August, the core PCE price index increased 3.7% year over year in September, marking the lowest gain since May 2021.
The core PCE price index increased by a modest 0.2% when housing was excluded. After only rising by 0.1% in August, the super core — PCE services excluding housing and energy — grew by 0.4%. September saw a 4.3% year-over-year increase in the super core PCE price index.
For monetary policy, the Fed monitors the PCE price indexes. To try to assess how well they are doing at combating inflation, policymakers are keeping an eye on the super core PCE price index. The recent spike in US Treasury yields and the sell-off in stocks are expected to tighten financial conditions, and the Fed is predicted to keep interest rates steady next Wednesday.
The Federal Reserve has increased its policy rate by 525 basis points since March 2022, bringing it to the present range of 5.25%–5.50%.
To consistently reduce inflation toward the 2% objective, more effort needs to be made.