United States consumer spending rose solidly in October while inflation declined, giving the economy a strong boost at the start of the fourth quarter as it faces increasing headwinds due to aggressive monetary policy tightening by the Federal Reserve.
The labor market, the other pillar of the economy, remains resilient. The number of Americans filing new unemployment benefits claims fell last week, almost negating the previous week’s surge, which had raised claims to a three-month high, other data showed on Thursday.
However, the outlook was clouded by the news that manufacturing activity fell in November for the first time in 2.5 years and that factories reported weaker demand. Yet economists remain cautiously optimistic that an expected recession next year would be short and mild.
“The consumer is alive and well,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “Even if consumers no longer buy in November and December, real consumer spending is currently well above normal and doesn’t look like a recession in any way.”
Consumer spending, which accounts for more than two thirds of US economic activity, rose 0.8 percent after an unrevised increase of 0.6 percent in September, the Department of Commerce said. The growth in October was in line with economists’ expectations.
Inflation-adjusted consumer spending rose by 0.5 percent, the strongest figure since January. Economic growth estimates for the fourth quarter are at an annualized rate of 2.8 percent. The economy grew by 2.9 percent in the third quarter.
Expenditure on goods rose by 1.4 percent, which was due to the purchase of motor vehicles, furniture and leisure items. Spending on services rose by 0.5 percent, which was increased by spending in restaurants and bars, as well as on housing and utilities.
Strong wage increases, one-time tax refunds in California, where some households received up to $1,050 in stimulus checks, and cost of living adjustments for food stamp recipients drove spending. Personal income rose by 0.7 percent, the highest figure in a year.
After taking inflation into account, the income available to private households rose by 0.4 percent. But consumers also used their savings to finance their purchases. The savings rate fell from 2.4 percent in September to 2.3 percent, the lowest level since July 2005.
Dwindling savings raise doubts about the sustainability of the current pace of spending.
“Every month that consumers lose their savings for the future to maintain a spending rate that exceeds their income, the more it affects their ability to weather the coming storm,” said Tim Quinlan, senior economist at Wells Fargo Securities in Charlotte, North Carolina.
However, other economists argued that the savings rate was simply normalizing.
“Only some of the excess savings accumulated in the first year of the pandemic were spent,” said Scott Hoyt, senior economist at Moodys’ Analytics in West Chester, Pennsylvania. “Loans are also available to many, although they are becoming more expensive.”
Production hits the wall
Jerome Powell, chairman of the Federal Reserve, said on Wednesday that the US central bank could reduce the pace of its interest rate hikes “as early as December.” The Fed is in the midst of the fastest interest rate hike cycle since the 1980s.
The price index for personal consumption expenditure (PCE) rose by 0.3 percent after rising by the same margin in September. In the 12 months to October, the PCE price index rose by 6 percent. This was the smallest gain compared to the previous year since December 2021.
Excluding volatile food and energy components, the PCE price index rose by 0.2 percent after rising by 0.5 percent in September. The so-called PCE core price index rose by 5 percent in October compared to the previous year, after rising by 5.2 percent in September.
The Fed is tracking the PCE price indices against its inflation target of 2 percent. Other inflation measures showed signs of slowing. The annual consumer price index rose by less than 8 percent in October for the first time in eight months.
The Fed has raised its key interest rate from near zero to a range of 3.75 to 4 percent.
Stocks on Wall Street gave up early gains after the Institute for Supply Management reported that its manufacturing purchasing managers’ index (Purchasing Managers’ Index) fell to 49 last month. This was the first decline and also the weakest figure since May 2020, when the economy recovered from the first COVID-19 wave, and was followed by 50.2 in October.
A figure below 50 indicates a decline in manufacturing, which accounts for 11.3 percent of the US economy. According to ISM, the index would need to fall below 48.7 to signal a recession in the overall economy. Declining demand was the dominant issue among manufacturers, with most blaming the “uncertain economic conditions” ahead of us.
Despite the uncertainty, the labor market remains tense. A third report from the Department of Labor showed that initial claims for government unemployment benefits fell by 16,000 to 225,000 seasonally adjusted in the week ending November 26.
Claims had risen to 241,000 in the previous week. While some of the increase was likely due to a surge in layoffs in the tech sector, demands at the start of the holiday season also tend to be volatile as companies temporarily suspend or slow down their hiring.
The Fed’s Beige Book reported on Wednesday of “sporadic” layoffs in November in the areas of technology, finance, and real estate, but found that “in the face of hiring difficulties, some contacts expressed their reluctance to lay off workers even as their labor needs declined.”
Technology layoffs helped drive the job cuts announced by US companies in November, a report from global outplacement firm Challenger, Gray & Christmas showed on Thursday. The planned job cuts rose by 127 percent to 76,835 last month.
“The data on unemployment claims does not suggest that the labor market will weaken by the end of November,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.