U.S. Consumer Spending, Jobless Claims Suggest Some Caution

(Bloomberg) -- U.S. consumer spending trailed forecasts in September while weekly applications for unemployment benefits rose more than projected, offering a note of caution on the economy as Federal Reserve policy makers signal a pause from interest-rate cuts.

Consumer outlays for goods and services, which account for about 70% of gross domestic product, increased 0.2% from the prior month after a 0.2% August advance that was larger than previously estimated, Commerce Department data showed Thursday. The report also showed income gains matched projections, while the Fed's preferred inflation gauge matched the slowest pace since 2016.

The figures suggest cooling momentum in Americans' spending, which is key to sustaining the record-long expansion -- and crucial for President Donald Trump's re-election prospects -- amid slowing payroll gains, trade tensions and weakness abroad. The data flesh out details on the economy after Wednesday's GDP report showed consumption grew more than forecast in the third quarter as business investment saw a steeper decline.

“It's undeniable that you're seeing a gradual erosion of consumer spending,” said Gregory Daco, chief U.S. economist at Oxford Economics. While the figures “point to ongoing consumer outlays supported by income growth,” it appears that the “income trend is slowing and that as a result consumers are going to be more cautious,” he said.

Other reports Thursday signaled more weakness to come. The Bloomberg Consumer Comfort Index posted the worst weekly decline in more than eight years, while a gauge of business activity in the Chicago region fell to the second-lowest level since 2009, indicating a deepening contraction.

Fed Chairman Jerome Powell highlighted a strong job market, rising incomes and solid consumer confidence in his press conference Wednesday after the central bank cut interest rates for a third straight meeting and suggested it would pause. “The consumer is really driving growth” and hasn't shown signs of being dragged down by weakness in manufacturing, exports or business investment, he said.

Powell also cited low levels for initial unemployment claims as another positive sign, and they remain relatively low even with the latest increase. The Labor Department's latest report Thursday showed that such filings rose 5,000 to 218,000 in the week ended Oct. 26, compared with projections for 215,000. The four-week average, a less-volatile measure, declined to 214,750.

Elsewhere in Thursday's data, the personal consumption expenditures price gauge, which the Fed officially targets for 2% inflation, was little changed from the prior month and up 1.3% from a year earlier.

The core PCE price index, which excludes food and energy, was also little changed from the prior month, slightly below projections, and up 1.7% from a year earlier. It increased at a 1.6% annualized rate over the past three months compared with 2.5% in the three months through August. Policy makers view the core gauge as a better indicator of underlying price trends.

After adjusting for the increase in inflation, spending rose 0.2% from the prior month. The gain in September was driven by new motor vehicle purchases and health-care outlays, according to the report.

Strike Effects

Consumer spending relies on wage gains. The Commerce Department's report showed wages and salaries were little changed in September from the prior month. The strike by General Motors Co. workers that began in September reduced wages and salaries by $1.9 billion during the month, according to the report.

The personal saving rate rose to 8.3% in September, the highest since March. Adjusted for inflation, disposable income rose 0.3% following a 0.5% gain.

The report also said special payments to farmers -- begun after the trade war with China hit the agriculture sector -- gave a “substantial” boost to farm proprietors' income in August and September.

Other data Thursday showed the Labor Department's employment cost index, a broad gauge monitored by the Fed, rose 0.7% from the prior quarter, matching projections. The gauge increased 2.8% from a year earlier, as wages and salaries for private workers increased 3% for a third straight period. A tight labor market pushes companies to increase wages and benefits which could ultimately spur broader inflationary pressures.

Compensation gains were broad-based across sectors, with stronger increases in construction, finance and sales. The government's quarterly ECI reading covers employer-paid taxes such as Social Security and Medicare along with other benefits.

The update follows Wednesday's release of third-quarter GDP, which showed growth held up at a 1.9% annualized rate on unexpectedly strong consumer spending. The October jobs report Friday will give more detail on whether the labor market will keep propping up spending.

--With assistance from Kristy Scheuble and Jeff Kearns.

To contact the reporter on this story: Reade Pickert in Washington at epickert@bloomberg.net

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

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