Consumer spending growth in the U.S. exceeded expectations

U.S. consumer spending rose more than expected in September, while underlying inflationary pressures continued to rise, likely forcing the Federal Reserve to raise interest rates another three-quarters of a percentage point next week.

However, there was some encouraging news in the fight against high inflation, and other data released by the Labor Department on Friday showed that private sector wage growth slowed significantly in the third quarter. Wage growth slowed in inflation-sensitive industries such as retail, construction and finance. Sectors such as health care and education, which continue to be understaffed, saw wages rise.

“Americans may say they’re worried about inflation, but they’re still shopping, which keeps the economy growing,” said Christopher Rupkey, chief economist at FWDBONDS in New York. – There’s no chance inflationary pressures will come down anytime soon because of slowing demand.”

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6 percent last month, according to the Commerce Department. Data for August were revised upward to show that spending rose 0.6% instead of the 0.4% previously reported.

Economists polled by Reuters had predicted consumer spending would rise 0.4%. Consumers stepped up car purchases and spent more on food, clothing, prescription drugs and recreational items. Spending on manufactured goods rose 0.3% after two consecutive monthly decreases. Spending on services also rose on housing and utilities, as well as transportation and restaurant meals. Spending on services rose 0.8%.

The data were included in the preliminary third-quarter gross domestic product report released Thursday, which showed a rebound in economic growth after a decline in the first half of the year.

The 2.6% annualized growth rate last quarter was driven by a sharp reduction in the trade deficit, with domestic demand at its weakest pace in two years.

Consumer spending growth slowed to 1.4% from 2.0% in April-June. However, September data suggest that momentum picked up at the end of the quarter, which bodes well for the final three months of 2022.

The Commerce Department report shows that the Personal Consumption Expenditures Index rose 0.3%, matching the increase in August. In the 12 months from September 2021 to September 2022, the index rose 6.2% after rising by the same amount in August.

Excluding increases in food and energy prices, the index rose 0.5%, the same increase as in August. The so-called core consumer spending index rose 5.1% year-over-year in September after rising 4, % in the 12 months to August.

The Fed tracks the consumer spending indices to set a 2% inflation target. Other inflation indicators are much higher. The consumer price index rose 8.2% year-over-year in September.

There are glimmers of hope, however. In a separate report released Friday, the Labor Department reported that the Employment Cost Index, the broadest measure of labor costs, rose 1.2% last quarter after rising 1.3% from April to June.

According to policymakers and economists, the index is one of the best ways to measure labor market volatility and a predictor of core inflation because it adjusts for changes in the composition and quality of jobs.

Labor costs rose 5.0% year over year after rising 5.1% in the second quarter.

Wages and salaries rose 1.3% after rising 1.4% in the second quarter. It rose 5.1% year over year after rising 5.3% in the previous quarter.

Even more encouraging, private-sector wages rose 1.2% after rising 1.6% in the second quarter. This lowered the annual gain in private sector wages to 5.2% from 5.7% in the second quarter.

Although inflation undermined consumer purchasing power, consumer spending rose in September, exiting on a higher growth trajectory in the fourth quarter. Inflation-adjusted consumer spending rose 0.3% last month, matching August’s increase.

Spending is supported by solid wage growth, which is driving income growth. Households are also using their savings to finance purchases. Personal income increased 0.4% last month, consistent with August’s increase.