US consumer spending rises even as wage growth rises | Business and Financial Issues | So Good News

US consumer spending rose more than expected in September as deflationary pressures persisted, prompting the Federal Reserve to raise interest rates by three quarters next week.

But there was encouraging news in the fight against inflation, with some from the Labor Department on Friday showing private sector wage growth slowed sharply in the third quarter.

“Americans may say they’re worried about inflation, but they’re buying bonds that will keep the economy growing for another quarter,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “There is no chance that inflationary pressures will soon disappear from the reduction in demand.”

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6 percent last month, the Commerce Department said. The August data was revised to show a 0.6 percent rise in income instead of 0.4 percent as previously reported.

Economists polled by the Reuters news agency had predicted that consumers would gain 0.4 percent. Consumers increased car purchases and spent more on food, clothing, prescription drugs and entertainment. There was also an increase in spending on work, housing and utilities as well as travel and dining.

The data was included in Thursday’s third-quarter gross domestic product (GDP) report, which showed post-contractual economic growth in the first half of the year.

Annual growth of 2.6% last quarter was largely due to a sharp decline in the trade deficit.

Growth in consumer spending slowed to 1.4 percent from the April-June pace of 2 percent. The last domestic demand was the softest in two years.

The Fed raised its interest rate overnight from near zero in March to 3 percent to 3.25 percent, the fastest rate hike in a generation or more. The streak has included three straight 75-base hits.

Cool demand has left economists hoping the US central bank could signal a slower rate hike at its November 1-2 policy meeting, although much will depend on inflation, which remains high.

Inflation is still hot

The consumer spending index (PCE) rose 0.3 percent last month, matching the gain in August. In the 12 months to September, the PCE price index increased 6.2 percent, matching the increase in August.

Excluding the perishable food and energy sectors, the PCE price index rose 0.5 percent after increasing by the same margin in August. The so-called core PCE price index advanced 5.1 percent year-on-year in September after a 4.9 percent increase in August.

The Fed tracks the PCE price target for its 2 percent inflation target. Some measures of inflation are doing very well. The number of buyers increased by 8.2 percent year-on-year in September.

But there is a glimmer of hope. In a separate report on Friday, the Labor Department said the Employment Cost Index (ECI), a broad measure of labor costs, rose 1.2 percent in the previous quarter after rising 1.3 percent in April-June.

ECI is widely regarded by policy makers and economists as one of the better methods of predicting labor market volatility and inflation because it adjusts the structure and dynamics of employment. It is being watched for confirmation that wage growth has peaked as economists try to determine when the Fed will begin to reduce its aggressive rate hikes.

Operating income rose 5 percent year-over-year after advancing 5.1 percent in the second quarter.

Wages and salaries rose 1.3 percent last quarter after rising 1.4 percent in the second quarter. They were 5.1 percent year-on-year after rising 5.3 percent in the previous quarter. Also encouraging, private sector wages rose 1.2 percent, down from a 1.6 percent jump in the second quarter. This lowered the annual growth in private sector wages to 5.2 percent from 5.7 percent in the second quarter.

That’s in line with recent data showing lower wages, including average hourly wages in the Labor Department’s monthly report and the Atlanta Fed’s wage tracker. Although the Fed’s “Beige Book” report last week showed “wage growth was widespread” in early October, it said that “reductions were reported in several governments”.

State and local government wages rose 2.1 percent in the third quarter after rising 0.7 percent in the second quarter.

But inflation eroded profits for workers. Inflation-adjusted wages for all workers are down 3 percent year over year. Quality rose 1 percent last quarter after a 1.2 percent increase in the April-June quarter. They were 4.9 percent year on year.

Despite the increase in prices, consumer spending did not take off in September, leading to a strong expansion heading into the fourth quarter. Consumer spending rose 0.3 percent after the same gain in August.

Spending is supported by still-strong earnings, which are raising capital. Households are also dipping into their shopping budgets.

Personal income rose 0.4 percent last month, matching the increase in August. The saving rate fell to 3.1 percent from 3.4 percent in August.