US consumer spending ends third-quarter with strong momentum

Reuters: U.S. consumer spending rose more than expected in September as households boosted purchases of motor vehicles and inflation increased steadily, which could bolster expectations of an interest rate hike from the Federal Reserve in December.

The Commerce Department said on Monday that consumer spending, which accounts for about 70% of U.S. economic activity, increased 0.5% after dipping 0.1% in August. Last month’s rise in consumer spending offered a fairly strong handoff from the third quarter to the current quarter.

The report was published ahead of the start of the Fed’s two-day policy meeting on Tuesday. The U.S. central bank is not expected to raise rates at this meeting, which comes about a week before the Nov. 8 presidential election, but is expected to do so in December.

Economists had forecast consumer spending rising 0.4% last month. When adjusted for inflation, consumer spending rose 0.3% after falling 0.2% in August.

The spending figures were incorporated into last Friday’s report on third-quarter gross domestic product. Consumer spending increased at a 2.1% annual pace after advancing at a robust 4.3% rate in the prior period.

A separate report on Monday showed factory activity in the U.S. Midwest hit a five-month low in October amid declining production and weak growth in new orders. The report from the Institute for Supply Management-Chicago suggests prolonged weakness in manufacturing as the sector continues to deal with the aftermath of a dollar rally and lower oil prices.

Consumer spending combined with a spurt in soybean exports and a turnaround in inventory investment to boost economic growth to a 2.9% pace in the third quarter. The economy grew at a 1.4% rate in the April-June quarter.

Rising wages due to a tightening labor market should help support consumer spending. With consumer spending firming, inflation continued to gain steadily last month. The personal consumption expenditures (PCE) price index increased 0.2% after a similar gain in August.

In the 12 months through September the PCE price index rose 1.2%, the biggest gain since November 2014, after advancing 1.0% in August.

Excluding food and energy, the so-called core PCE price index rose 0.1% after advancing 0.2% in August. In the 12 months through September the core PCE rose 1.7% after a similar increase in August.

The core PCE is the Fed’s preferred inflation measure and is running below its 2% target.

Consumer spending last month was lifted by a 1.3% surge in purchases of long-lasting manufactured goods such as automobiles. Spending on services rose 0.3%.

Personal income increased 0.3% in September after rising 0.2% in August. Wages and salaries advanced 0.3% after edging up 0.1% the prior month. Savings fell to $797.8 billion from $820.5 billion in August.