U.S. Consumer Spending Grows at Fastest Pace Since 2009

U.S. consumer spending recorded its biggest increase in more than eight years in September, likely as households in Texas and Florida replaced flood-damaged motor vehicles, but underlying inflation remained muted.

Households, however, dipped into their savings to fund purchases last month, pushing savings to their lowest level since 2008. Against the backdrop of lackluster wage growth, the drop in savings suggests that September’s robust pace of consumer spending is probably unsustainable.

“Relying on consumer savings to move the economy forward is not going to last for long,” said Chris Rupkey, chief economist at MUFG in New York.

The Commerce Department said on Monday consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 1.0 percent last month after an unrevised 0.1 percent gain in August. The increase, which also included a boost from higher household spending on utilities, was the largest since August 2009.

Economists had forecast consumer spending increasing 0.8 percent in September. The data was included in last Friday’s third-quarter gross domestic product report, which showed consumer spending growth slowing to a 2.4 percent annualized rate after a robust 3.3 percent pace in the second quarter.

The moderation in consumption was offset by a rise in inventory investment, business spending on equipment and a drop in imports, which left the economy growing at a 3.0 percent rate in the third quarter after the April-June period’s brisk 3.1 percent pace.

U.S. financial markets were little moved by the data ahead of the Federal Reserve’s two-day policy meeting, which starts on Tuesday. Investors were also awaiting the announcement of a new Fed chief, which is expected this week.

Prices for U.S. Treasuries were trading higher, while the dollar fell against a basket of currencies. Stocks on Wall Street were largely flat.

The Commerce Department said the September data reflected the effects of Hurricanes Harvey and Irma, but said it could not quantify the total impact of the storms on consumer spending and personal income.

Consumer spending in September was buoyed by purchases of motor vehicles, probably as drivers in Texas and Florida replaced automobiles that were destroyed when Harvey and Irma slammed the states in late August and early September.

Spending on long-lasting goods like autos surged 3.2 percent last month. Outlays on services rose 0.5 percent.

Though disruptions to the supply chain as a result of the hurricanes also likely contributed to an uptick in inflation last month, underlying price pressures remained benign.

The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, edged up 0.1 percent in September. The so-called core PCE has now increased by 0.1 percent for five straight months.

The core PCE increased 1.3 percent in the 12 months through September after a similar gain in August. The core PCE has undershot the Fed’s 2 percent target for nearly 5-1/2 years.

The soft core PCE readings are likely to intensify the inflation debate among Fed officials.

Some policymakers believe the low inflation readings are the result of transitory factors like one-off reductions in the costs of mobile phone services, and expect price pressure to rise as the labor market tightens. Others, however, worry that the factors behind tame inflation could prove more persistent.

The U.S. central bank is unlikely to raise interest rates this week, but is expected to do so in December. It has raised rates twice this year.

When adjusted for inflation, consumer spending increased 0.6 percent in September after slipping 0.1 percent in August. While that put consumer spending on a higher growth trajectory heading into the fourth quarter, the pace is unlikely to be maintained.

Personal income rose 0.4 percent last month after increasing 0.2 percent in August. Income at the disposal of households after inflation was flat after slipping 0.1 percent in August.

With spending outpacing income, savings fell to $441.9 billion in September, the lowest level since August 2008, from $521.4 billion in the prior month. The saving rate dropped five-tenths of a percentage point to 3.1 percent, the lowest level since December 2007.

“The low savings rate is expected to be a larger constraint on consumer spending in the months ahead and could lead to higher delinquency rates for some categories of consumer credit if real income growth continues to lag,” said Scott Anderson, chief economist at Bank of the West in San Francisco.