Reuters
US consumer spending fell for the first time in eight months in September, but a rise in consumer sentiment to more than a seven-year high this month indicated economic growth would remain on solid ground.
The economic picture also received a boost from other data yesterday showing factory activity in the Midwest accelerated sharply in October, while wages in the third quarter recorded their largest increase in more than six years. Strong wage growth has been the missing piece of the recovery puzzle.
“The fundamentals of the economy remain very strong, the conditions are in place for continued above-trend growth,” said Gus Faucher, a senior economist at PNC Financial Services in Pittsburgh.
Consumer spending, which accounts for more than two-thirds of US economic activity, declined 0.2% last month, the first drop since January, after a 0.5% increase in August, the Commerce Department said.
The weak end to the third quarter suggested consumer spending could slow early in the October-December period, and chip at the economy’s momentum. The economy grew at a 3.5% annual pace in the third quarter.
But with consumer sentiment this month hitting its highest level since July 2007, wage growth starting to pick up and gasoline prices at a near four-year low, the broad-based drop in consumption is likely to be temporary.
The Thomson Reuters/University of Michigan’s index on consumer sentiment rose to 86.9 in October from 84.6 last month, a separate report showed.
Another report from the Labor Department showed its Employment Cost Index, the broadest measure of labour costs, increased 0.7% after rising by the same margin in the second quarter.
Wages and salaries, which account for 70% of employment costs, rose 0.8% in the third quarter, the largest increase since the second quarter of 2008. They had gained 0.6% in the second quarter.
US Treasury debt prices fell on the mixed data, while the dollar rallied to its highest level since June 2010 against a basket of currencies. US stocks were trading sharply higher.
Various business surveys have been hinting at an acceleration in wage growth. The third-quarter increase in wages and salaries is a welcome sign for the labour market.
“This first sign of rising wage pressure in hard data releases corroborates the Federal Reserve’s more sanguine assessment of the labour market,” said Harm Bandholz, chief US economist at UniCredit Research in New York.
“If sustained, which we expect, it will further strengthen the Fed’s commitment to continue its policy normalisation path, and to eventually raise rates.”
Fed officials on Wednesday gave a fairly upbeat assessment of the labour market, dropping their characterisation of labour market slack as “significant” and replacing it with “gradually diminishing.”
Weak consumption is keeping a lid on inflation. A price index for consumer spending edged up 0.1% after slipping 0.1% in August. In the 12 months through September, the personal consumption expenditures (PCE) price index rose 1.4% for a second straight month.
Excluding food and energy, prices rose 0.1% for a third consecutive month. The so-called core PCE price index increased 1.5% in the 12 months through September.
Both price measures continue to run below the US central bank’s 2% inflation target.
