US data point to modest Q4 growth
Consumer spending rises 0.1% in Oct
WASHINGTON: US consumer spending barely rose in October as households took advantage of rising incomes to boost savings to their highest level in nearly three years, pointing to moderate economic growth in the fourth quarter.
Anemic consumer spending did little do change expectations that the Federal Reserve will raise interest rates next month as other data on Wednesday showed a surge in business spending plans in October and a drop in new applications for unemployment benefits last week.
“As far as fourth-quarter GDP goes, that is likely to keep estimates close to 2%. That’s enough to justify a rate hike as long as next Friday’s employment report is not a disaster,” said Chris Low, chief economist at FTN Financial in New York.
The Commerce Department said consumer spending edged up 0.1% after a similar increase in September. That suggests consumer spending, which accounts for more than two-thirds of US economic activity, has slowed from the third quarter’s brisk 3.0% annual pace.
The tepid rise in consumer spending could combine with an anticipated drag from an ongoing inventory reduction to hold the economy to around a 2% growth rate in the fourth quarter.
But the economy, which expanded at a 2.1% pace in the third quarter, could get support from business spending.
In a second report, the Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, jumped 1.3% last month after rising 0.4% in September.
Coming on the heels of data this month showing a solid increase in manufacturing output in October, it suggested the worst of the drag from a strong dollar and deep spending cuts by energy firms was over.
Fed officials had held off raising rates at their last two meetings as they assessed the degree to which dollar strength and a slowing in economies overseas would weigh on the United States.
“The surge in core capital goods orders could be a crucial signal that this important sector of the economy may be at a turning point, further bolstering the Fed’s confidence in the sustainability of the economic recovery,” said Millan Mulraine, deputy chief US economist at TD Securities in New York.
Manufacturing, which accounts for 12% of the economy, has been slammed by the buoyant dollar and energy sector spending cuts. The greenback has gained 18.1% against the currencies of the United States’ main trading partners since June 2014.
The pace of appreciation, however, is gradually slowing.
While consumer sentiment increased in November from October, households continued to fret over their financial prospects, another report showed.
But as the labour market continues to tighten, there is optimism that wage growth will pick up and encourage consumers to loosen their purse strings and boost spending.
A fourth report from the Labour Department showed first-time applications for state unemployment benefits declined 12,000 to a seasonally adjusted 260,000 for the week ended Nov 21.
Claims have now held below the 300,000 threshold for 38 consecutive weeks, the longest stretch in years, and are near levels last seen in 1973.
Strengthening labour market conditions are gradually lifting income. The Commerce Department said personal income increased 0.4% last month after rising 0.2% in September. Wages and salaries shot up 0.6%, the largest gain since May.
Savings increased to $761.9 billion, the highest level since December 2012, from $722.9 billion in September. Higher savings could over time buoy consumer spending.
There was still no sign of inflation, which has persistently run below the Federal Reserve’s 2% target.
A price index for consumer spending rose 0.2% in the 12 months through October after a similar rise in September. Excluding food and energy, the personal consumption expenditures price index was up 1.3% for the 10th straight month.
In another report, the Commerce Department said new homes sales jumped 10.7% in October, which could allay concerns of a significant slowdown in housing.