US consumer spending is strong; lowest income gain in 15 months

WASHINGTON (Reuters) – US consumer spending rose for a seventh consecutive month in September, but income recorded its smallest increase in more than a year thanks to moderate wage growth, making suggests that the current pace of spending should not be maintained.

The report released Monday by the Commerce Department also showed that the increase in household income was the lowest in 15 months and that savings had fallen to its lowest level since last December.

There are signs that the $ 1.5 trillion tax stimulus provided by the Trump administration has reached its peak. Rising interest rates and declining household wealth after a sell-off in the stock market are casting a shadow over spending.

"It remains to be seen how long the continued spending can continue," said Sung Won Sohn, chief economist at SS Economics in Los Angeles. "The fiscal stimulus has reached a plateau. Rising interest rates and stock market volatility have both psychological and real effects. "

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4% last month as households bought more motor vehicles and spent more on health care. August data was revised upwards to show that spending rose 0.5% instead of the previously announced 0.3% gain.

Economists polled by Reuters forecast an increase in consumer spending of 0.4% in September. After adjusting for inflation, consumer spending rose 0.3%. Real consumer spending rose 0.4% in August.

The data appeared in the report on gross domestic product released last Friday in the third quarter, which showed that consumer spending rose by 4.0% annualized, the highest rate in almost four years.

The economy grew 3.5% in the third quarter, a slowdown from the steady pace of 4.2% from April to June.

The .DXY dollar traded higher against a basket of currencies, while US Treasury prices fell. Shares on Wall Street have risen, recovering some of last week's significant losses.

Inflation rises steadily

The increase in real consumer spending in September paved the way for strong growth starting in the fourth quarter. Economists predict a slowdown in consumer spending in the first half of 2019.

Personal income rose 0.2% last month, the smallest increase since June 2017, following a 0.4% gain in August. Disposable income also increased 0.2%. Wages jumped 0.2% after jumping 0.5% in August.

Wage growth remains gradual, although the unemployment rate is close to 3.7%, its lowest level in 49 years. The savings rate fell to $ 975.7 billion last month, its lowest level since December 2017, up from $ 1.0 trillion in August.

Economists estimate that tax cuts have had a stimulating effect in the third quarter. The .SPX stock market index lost nearly 8% this month.

At the moment, consumer fundamentals are solid, with consumer confidence reaching record highs for several years.

"We expect moderate growth in consumption in the first half of 2019 with the gradual reduction of tax cuts, but favorable fundamentals should translate into a strong new holiday shopping season," said Roiana Reid, economist at Berenberg Capital Markets. At New York.

In September, spending on goods climbed 0.6%. Consumers also spent more on sporting goods. Spending on services rose 0.3%, as health care expenses offset lower spending on food and accommodation.

Prices continued to rise steadily in September. The price index of personal consumption expenditure, excluding unstable components of food and energy products, rose 0.2% after being stable in August.

This left the year-over-year increase in the PCE Base Price Index to 2.0% for a fifth consecutive month.

The basic PCE index is the preferred measure of inflation by the Federal Reserve. It reached the 2% inflation target of the US central bank in March for the first time since April 2012.

The Fed is expected to raise interest rates again in December, despite tighter financial market conditions resulting from the collapse of stock markets and rising US Treasury yields. The central bank raised rates in September for the third time this year and removed the reference to monetary policy as "accommodative" in its policy statement.

"The recent stability of underlying inflation will deter the Fed from raising rates next week, but the rate of economic growth still above its potential will trigger an evolution in December," said economist Sal Guatieri. Principal at BMO Capital Markets in Toronto.