US consumer spending solid; Income growth smallest in 15 months

WASHINGTON (Reuters) – US consumer spending rose for the seventh month in a row in September, but income, with moderate wage growth, had the lowest profit in more than a year, suggesting that the current pace of spending is unlikely to continue.

FILE PHOTO – A family shops at Wal-Mart Super Center in Springdale, Arkansas on June 4, 2015. REUTERS / Rick Wilking / File Photo

The Monday's Ministry of Commerce report also showed that households' income increase was lowest in 15 months and savings fell to their lowest level since December last year.

There are signs that the stimulus from Trump's $ 1.5 trillion tax package has peaked. Higher interest rates and declining household wealth following a sharp sell-off of equities also cast a shadow over spending.

"It remains to be seen how long the buying spree can last," said Sung Won Sohn, chief economist at SS Economics in Los Angeles. "The incentive from the tax cut has risen, with rising interest rates and volatile equity markets having both psychological and real effects."

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4 percent last month as households bought more motor vehicles and spent more on health care. August data has been revised to increase spending by 0.5% instead of the previously reported 0.3% gain.

Reuters surveyed economists forecast a 0.4% increase in consumer spending in September. Adjusted for inflation, consumer spending rose by 0.3 percent. The so-called real consumer spending climbed in August by 0.4 percent.

Data was included in last Friday's third quarter gross domestic product report, which showed that consumer spending accelerated at an annualized rate of 4.0 percent, the fastest in nearly four years.

The economy grew 3.5 percent in the third quarter, down from the strong April-June period of 4.2 percent.

Dollar .DXY traded higher against a basket of currencies, while US Treasury prices fell. Wall Street stocks rallied to make up for last week's losses.

Inflation is steadily rising

The rise in real consumer spending in September resulted in a solid growth path into the fourth quarter. Economists expect consumer spending to slow in the first half of 2019.

Personal income rose 0.2% last month, the lowest since June 2017, after rising 0.4% in August. The disposable income also increased by 0.2 percent. Wages climbed 0.2 percent after a jump of 0.5 percent in August.

Wage growth remains gradual, although the unemployment rate is close to a 49-year low of 3.7 percent. The savings rate fell to $ 975.7 billion last month, the lowest level since December 2017, from $ 1.0 trillion in August.

Economists believe tax cuts peaked in the third quarter. The stock market's S & P 500 Index .SPX has fallen nearly 8 percent this month.

At the moment, consumer spending fundamentals are strong, with consumer confidence at multi-year highs.

"We expect consumption growth to slow in the first half of 2019 as tax cuts wane, but in the near future the favorable fundamentals are likely to lead to another strong Christmas season," said Roiana Reid, an economist with Berenberg Capital Markets in New York.

In September, spending on goods rose 0.6 percent. Consumers also spent more on sporting goods. Expenditure on services rose by 0.3 per cent, with health care spending offsetting a decline in restaurant and accommodation expenses.

Prices rose steadily in September. The Consumer Discretionary Price Index (PCE) excluding the volatile food and energy components rose 0.2 percent after stagnating in August.

Thus, the so-called core PCE price index increased for the fifth month in a row by 2.0 percent compared to the previous year.

The core PCE index is the Federal Reserve's preferred inflation measure. It hit the US Federal Reserve's inflation target of 2 percent for the first time since April 2012.

The Fed is expected to raise interest rates again in December, despite the worsening of financial market conditions caused by the decline in equity markets and an increase in US Treasury yields. The central bank raised interest rates for the third time this year in September, removing a reference to "expansive" monetary policy from its policy statement.

"The recent stability of core inflation will keep the Fed from raising interest rates next week, but the still above-potential growth rate will drive a move in December," said Sal Guatieri, chief economist at BMO Capital Markets in Toronto.

Reporting by Lucia Mutikani; Editing by Paul Simao

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