US Consumer Spending Scourd strong Q3 Finish

US consumer spending exhibited In the month of September a substantial upturn. That predominantly driven by increased purchases of motor vehicles and heightened travel activities. This surge in spending has consequently maintained an upward trajectory as the fourth quarter commenced.

This unexpected surge in consumer spending, as reported by the Department of Commerce. Coincided with elevated monthly inflation figures. That primarily attributed to escalating costs in services, notably within the housing sector. Nevertheless, it is anticipated that consumer spending will decelerate in early 2024. That comes as the surplus savings accumulated during the pandemic gradually deplete. As a result, there is a growing consensus among economists that the Federal Reserve has concluded its interest rate hikes. Although the potential for rate increases remains.

Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, underscored that U.S. consumers displayed robust spending in the previous month. Carrying potential risks into the current quarter. Despite the expected significant decline in spending and economic activity in the fourth quarter. Still there remains a possibility that both could continue to outpace the Fed’s intentions to curb persistent inflation in certain service sectors.

Strong Surge in US Consumer Spending and Implications for Economic Growth

U.S. Consumer spending, which plays a pivotal role in propelling the U.S. economy, surged by 0.7% last month. Following a previously unaltered 0.4% rise in August. And that as reported by the Bureau of Economic Analysis within the Department of Commerce. Significantly, this exceeded the economists’ consensus projection of a 0.5% increase. As per as reported by Reuters.

The increase in U.S. Consumer spending was observed in both goods and services categories. Goods expenditures rose by 0.7%, with significant contributions from prescription medication. Also new light trucks, food and beverages, as well as recreational goods and vehicles. On the other hand, services spending recorded a substantial 0.8% increase. Driven by international travel, housing and utilities, healthcare, and airline transportation services.

This data was incorporated into the preliminary report on the gross domestic product for the third quarter. Which published the previous Thursday. It played a significant role in the rapid economic growth witnessed, marking the fastest growth in nearly two years. Adjusted for inflation, consumer spending rose by a solid 0.4% in September. Which bodes well for consumption and overall economic growth in the fourth quarter.

Also Read: US Markets Analysis and ECB’s Dilemma

However, it is unlikely that this growth will match the exceptional performance of the previous quarter. Consumers have been tapping into their savings. That leads to a decrease in the savings rate from 4.0% in August to 3.4%. Personal income showed a modest increase of 0.3%, and after accounting for inflation and taxes. That comes disposable income for households declined for the third consecutive month.

Concerns Mount Over Depleting Savings and Shifting Debt in the US Economy

Although US Consumer spending finished Q3 strong. Concerns are mounting regarding the sustainability of this trend, as excess savings, primarily among high-income households, are rapidly depleting, with estimates suggesting they could be exhausted in the first half of the upcoming year. Many individuals are turning to debt to finance their expenditures, including the resumption of student loan repayments for some.

Nonetheless, some economists argue that the rising credit card balances do not pose an imminent threat, as consumers can meet their debt obligations, thanks to a robust labor market. Wages increased by 0.4% following a 0.5% gain in the previous month.

US Consumer spending: Financial Stability and Market Response to US Economic Indicators

In terms of financial stability, US consumer of households seem to be in a relatively healthy position compared to past economic cycles. Debt levels are low, savings remain relatively high, and income remains robust, which does not currently provide compelling evidence of an imminent spending slowdown.

In response to this economic data, stocks on Wall Street were trading higher, while the dollar depreciated against a basket of currencies, and U.S. Treasury prices exhibited mixed movements.

Furthermore, monthly inflation remained elevated in September, with the personal consumption expenditures (PCE) price index rising by 0.4%. Food prices increased by 0.3%, and energy prices surged by 1.7%. Over the 12 months through September, the PCE price index registered a 3.4% increase, aligning with August’s figure.

PCE Price Index and the Federal Reserve’s Monetary Policy Focus

Excluding volatile food and energy components, the core PCE price index saw a 0.3% increase, compared to a 0.1% increase in August. Housing services costs rose by 0.5%. Economists suggest that monthly inflation rates of 0.2% are necessary to achieve the U.S. central bank’s 2% target.
The core PCE price index, which excludes housing, experienced a more moderate 0.2% rise. The so-called “super core,” representing PCE services excluding energy and housing, increased by 0.4%, after a slight 0.1% uptick in August. In September, the super core PCE price index exhibited a year-on-year gain of 4.3%.

The Federal Reserve closely monitors the PCE price indexes for its monetary policy decisions. In the upcoming week, it is expected that the Fed will keep interest rates unchanged, primarily in response to recent increases in U.S. Treasury yields and stock market fluctuations, which have resulted in tightened financial conditions. Notably, the Fed has raised its policy rate by 525 basis points since March 2022, bringing it to the current 5.25%-5.50% range.

Pooja Sriram, an economist at Barclays in New York, emphasized that there is still work to be done in order to sustainably lower inflation toward the 2% target set by the Federal Reserve.

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Please note that this article serves solely for informational purposes. As such, it is not financial advice. We strongly advise readers to conduct thorough research and consult with financial professionals before making any investment decisions.