US consumer spending is strong; strong wage gains point to a long period of high inflation

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  • Consumer spending increases 0.6% in September
  • Personal income drops by 1.0%; wages jump 0.8%
  • The Core PCE price index gains 0.2%; up 3.6% year on year
  • Pay increase in the third-third quarter

WASHINGTON, Oct.29 (Reuters) – US consumer spending rose sharply in September, but was partly flattered by rising prices, with inflation remaining high as shortages of motor vehicles and other goods persist in a context of global supply constraints.

Inflationary pressures are widening, with other data on Friday showing employers raised wages the most on record in the third quarter as they competed for scarce workers. The industry-wide push could undermine Federal Reserve Chairman Jerome Powell’s long-held view that high inflation is transitory.

The strength in consumer spending at the end of the last quarter, along with the drop in COVID-19 infections and the recovery in consumer confidence bode well for a pickup in economic activity in the last three months of this year. year round, although shortages and more expensive products present risks. The economy grew at its slowest pace in over a year in the third quarter.

“The economy is about supply, not demand,” said Christopher Rupkey, chief economist at FWDBONDS in New York City. “The economy has money to burn and that is why inflation will be difficult to put out.”

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.6% last month after rebounding 1.0% in August, the Commerce Department said. Economists polled by Reuters predicted a 0.5% increase in consumer spending.

Spending was driven by demand for services such as healthcare, restaurants, and hotel and motel accommodation amid declining cases of the Delta coronavirus variant. A wave of infections over the summer exacerbated labor shortages at factories, mines and ports, further straining supply chains.

Spending on services rose 0.6% after advancing 0.7% in August. This offset a 0.2% drop in spending on durable manufactures, which largely reflected lower sales of new motor vehicles.

Apart from the spring 2020 shutdown, which severely depressed production, the third quarter was the worst period for motor vehicle production since early 2009 due to a global semiconductor shortage. Auto stocks have been depleted and some shelves are empty, reducing expenses and raising prices.

Price pressures remained strong in September, reducing the purchasing power of consumers. The personal consumption expenditure price index (PCE), excluding the volatile components of food and energy, rose 0.2%. This was the smallest gain since February and followed a 0.3% increase in August.

In the 12 months to September, the so-called core PCE price index rose 3.6% for a fourth consecutive month. The PCE core price index is the Fed’s preferred inflation measure for its flexible 2% target. Adjusted for inflation, consumer spending rose 0.3% after advancing 0.6% in August.

Wall Street stocks were trading lower after dismal results at large-cap companies Apple and Amazon.com rekindled concerns over labor and supply shortages. The dollar appreciated against a basket of currencies. US Treasury prices were mixed.

Woman texting on her cell phone as she waits for a friend outside a supermarket on Roosevelt Avenue during the coronavirus disease (COVID-19) outbreak in the Queens neighborhood of New York, New York, United States United, April 2, 2020. REUTERS / Stefan Jérémie

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INCREASE IN SALARIES

The Fed is expected to announce at next week’s policy meeting that it will start reducing the amount of money it puts into the economy through monthly bond purchases.

Data on consumer spending and inflation were included in the advanced gross domestic product report for the third quarter released on Thursday.

Growth in consumer spending slowed to an annualized rate of 1.6% after double-digit gains in the previous two quarters. This limited economic growth to a rate of 2.0%, the slowest since the second quarter of 2020, when the economy suffered a historic contraction following strict mandatory measures to contain the first wave of COVID infections. -19. Read more

Strong inflationary pressures were highlighted by a separate Labor Ministry report on Friday, showing that the employment cost index, the broadest measure of labor costs, jumped 1.3% in the third trimester.

The largest gain since the first quarter of 2001, when the government started tracking the series, reflected an increase in all industries and followed a 0.7% increase in the April to June period . Labor costs rose 3.7% year-on-year, the largest increase since the fourth quarter of 2004, after increasing 2.9% in the second quarter.

The CIS is viewed by policymakers and economists as one of the best measures of the labor market slowdown and a predictor of core inflation, as it adjusts to changes in the composition and quality of the labor market. ‘use. Economists expected the ECI to grow 0.9% in the third quarter.

Wages and salaries climbed a record 1.5% in the last quarter after increasing 0.9% in the April-June quarter. They are up 4.2% over one year. Benefits rose 0.9% after increasing 0.4% in the second quarter. The COVID-19 pandemic has disrupted the dynamics of the labor market, creating a severe shortage of workers across the economy. There were 10.4 million vacancies at the end of August.

“As we expect wage growth to slow in the second half of 2022, as more workers return to the workforce, short-term pressure on labor costs will continue to loom large. ‘inflation at a high level for the next few quarters and will make it difficult to return to the Fed’s 2% target in the near future, “said Sarah House, senior economist at Wells Fargo in Charlotte, North Carolina .

Strong wage growth and plentiful savings should help support consumer spending and sustain economic expansion. Although Commerce Department data showed personal income fell 1.0% in September, that largely reflected the expiration of government-funded unemployment benefits.

Wages rose a strong 0.8% last month. The savings rate fell to a still high level of 7.5% from 9.2% in August.

Household wealth is reaching record highs, thanks to a strong stock market and high house prices, which allows consumers to increase their spending when supply improves. Consumers also accumulated at least $ 2.5 trillion in excess savings during the pandemic.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

Our Standards: The Thomson Reuters Trust Principles.


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