U.S. Consumer Spending Powers Ahead Despite Inflation Pickup
U.S. consumer spending powered ahead in October even as Americans confronted the fastest inflation in three decades.
(Bloomberg) -- American consumers -- the U.S. economy’s main engine -- showed little hesitation on spending last month despite the fastest inflation in three decades, setting up the economy for a year-end growth spurt.
Purchases of goods and services, unadjusted for changes in prices, increased 1.3%, the most since March, the Commerce Department said Wednesday. Even after accounting for higher prices, spending still exceeded projections in a sign that consumers started their holiday shopping early.
The figures, the main course of a pre-Thanksgiving data feast that included robust orders for business-equipment, a surge in exports and a pickup in new-home sales, help explain why several economists upgraded their tracking estimates for fourth-quarter economic growth.
The reports further complicate matters for Federal Reserve policy makers, who are trying to balance rapid inflation and a labor market still 4 million jobs shy of pre-pandemic levels. Mary Daly, president of the San Francisco Fed bank, is the latest official to suggest a faster tapering of the central bank’s asset-purchase program may be needed.
The personal consumption expenditures price gauge, which the Federal Reserve uses for its inflation target, rose 0.6% from a month earlier and 5% from October 2020. After adjusting for higher inflation, spending rose a healthy 0.7% as outlays for both goods and services picked up.
“The combination of higher inflation risks and consumer resiliency means that the likelihood of the Fed accelerating the pace of taper has increased substantially,” Bloomberg Economics’ Anna Wong and Eliza Winger, wrote following the report.
Read more: U.S. REACT: Fed’s Price Gauge Points to Likely Faster Taper
Economists at JPMorgan Chase & Co. revised up their fourth-quarter GDP tracking estimate to an annualized 7% from 5% following Wednesday’s data. Morgan Stanley economists took their running forecast up to 8.7% from 3%, while Capital Economics now expects 6.5% growth.
That’s not to say the economy is without challenges. Robust demand is further straining supply chains and inflation has driven a collapse in consumer sentiment. Moreover, a pickup in Covid-19 cases in recent weeks risks restraining activity through the winter.
Worker Pay
Meantime, wages and salaries rose 0.8% in October after a 0.9% increase, the Commerce Department’s report showed. A host of companies, including Macy’s Inc. and Sherwin-Williams Co., are raising wages and boosting perks in a war for talent.
If wage growth is sustained at the current pace, “spending can remain torrid even without new government help and in the face of rapid inflation,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note.
Personal income climbed 0.5% even as government assistance to workers during the pandemic subsided further. The saving rate -- or personal saving as a share of disposable income -- fell to 7.3%, more in line with pre-pandemic readings and signaling Americans have less of a cushion.
Disposable personal income, or after-tax income adjusted for inflation, fell for a third month, dropping 0.3% in October. Inflation-adjusted spending on merchandise rose 1% last month, while outlays for services increased 0.5%, the report showed.
The core price index, which excludes food and energy, rose 4.1% from a year ago, the most since 1991. Looking ahead, inflation is expected to surge even higher in the coming months as persistent supply chain challenges and ongoing hiring difficulties push prices higher.
Wednesday’s Data Deluge
- Non-defense orders for business equipment excluding aircraft rose a larger-than-forecast 0.6% in October. Prior month revised up to 1.3% gain
- 3Q GDP rose an annualized 2.1%, up from initial estimate of 2%. Revision reflected stronger consumer outlays and bigger contribution from inventories
- New-home sales climbed 0.4% to annualized 745,000
- Michigan consumer sentiment index fell to decade-low of 67.4 in November from month earlier
- Merchandise trade deficit shrank to $82.9 billion in October as exports surged
- Initial jobless claims plunged to 199,000 last week, a level not seen since 1969. It largely reflected seasonal adjustment factors as unadjusted applications rose
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