U.S. Consumer Spending Cools; Inflation May Encourage Fed

(Bloomberg) -- U.S. consumer spending settled back in October to a still-decent pace after the biggest increase since 2009, as a post-storm surge in auto sales cooled. Incomes remained robust and inflation showed progress toward the Federal Reserve's goal.

Purchases rose 0.3 percent, matching the median projection in a Bloomberg survey of economists, after a revised 0.9 percent advance in September, Commerce Department figures showed Thursday in Washington. Incomes grew 0.4 percent for a second month, marking the best back-to-back gains since early 2017.

The figures, including the biggest rise in inflation-adjusted disposable income in five months, indicate American consumers are likely to drive growth this quarter as a pickup in business investment also helps lift demand. Inflation data in the report may add further support for a Fed interest-rate increase in December that's already widely anticipated by investors.

Even so, inflation-adjusted spending grew 0.1 percent in October -- less than analysts had penciled in -- following a 0.5 percent gain in September. The data spurred some cuts to tracking estimates of the pace of economic growth this quarter. The Atlanta Fed lowered its forecast to 2.7 percent from 3 percent, while Barclays Plc reduced its tracking projection by 0.1 percentage point to 2.2 percent.

The central bank's preferred price gauge, excluding food and energy, rose 0.2 percent in October from the prior month. September's monthly gain was revised upward to 0.2 percent from 0.1 percent, making for the fastest consecutive increases since January and February.

While the latest figures indicate progress toward the Fed's 2 percent goal, inflation remains below target on an annual basis, as it has for most of the past five years. Including all items, prices rose 1.6 percent from a year earlier following an upwardly revised 1.7 percent; the so-called core measure was up 1.4 percent for a second month.

Inflation Mystery

U.S. central bankers have said persistently low inflation is somewhat of a mystery and taken note of sluggish wage gains amid a tightening labor market. Even so, Fed Chair Janet Yellen reiterated Wednesday that she expects inflation will gradually rebound to the Fed's target as transitory factors dissipate.

“Fed officials have shown varying degrees of discomfort with the soft inflation figures in recent months, and the tentative evidence of a turnaround will be sufficient to soothe the nerves of all but the most dovish” policy makers, Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York, said in a note.

The latest results follow data released Wednesday showing gross domestic product grew at a 3.3 percent annualized pace in the third quarter, the fastest in three years, though household purchases were revised down slightly.

Nonetheless, the October consumption and income data bode well for the holiday shopping season under way. Steady hiring, rising stock and home prices, and low borrowing costs are underpinning purchasing power for households, whose spending accounts for about 70 percent of the economy.

Disposable income, or earnings adjusted for taxes and inflation, rose 0.3 percent in October, the biggest gain since May, after little change in September. A sustained acceleration in worker pay has remained elusive throughout the expansion that began in mid-2009.

A separate report on Thursday showed the labor market remains supportive for consumer spending. Applications for unemployment benefits fell by 2,000 to 238,000 last week, which included the Thanksgiving holiday, according to Labor Department data. That's close to the median estimate of 240,000 in a Bloomberg survey and below levels seen as consistent with a healthy job market.

Another report Thursday showed consumer sentiment was little changed last week near a 16-year high. The Bloomberg Consumer Comfort Index eased to 51.6 from 51.7, while the index reached a 10-year high in the South.

Other Details

• Saving rate rose to 3.2 percent from 3 percent in September, which was the lowest since December 2007
• Wages and salaries rose 0.3 percent from prior month after a 0.5 percent increase
• Durable goods spending, adjusted for inflation, fell 0.1 percent in October after a 3.1 percent jump in September that partly reflected auto purchases; nondurable goods rose 0.5 percent after a 0.1 percent gain
• Household outlays on services, adjusted for inflation, were little changed following a 0.2 percent rise

--With assistance from Jordan Yadoo

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net.

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle

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