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Consumer Spending in U.S. Increases 0.8% as Incomes Climb

Consumer Spending in U.S. Increases by Most in Seven Months
The economy expanded at a 2 percent annual pace in the third quarter, helped by a pickup in household purchases as an improving housing market boosted confidence. Photographer: Victor J. Blue/Bloomberg

Consumer spending in the U.S. climbed more than forecast in September, a sign the biggest part of the economy was picking up as the quarter drew to a close.

Household purchases, which account for about 70 percent of gross domestic product, rose 0.8 percent, the most since February, after advancing 0.5 percent in August, a Commerce Department report showed today in Washington. The median estimate in a Bloomberg survey of 71 economists called for a 0.6 percent gain. Incomes climbed 0.4 percent, the most since March.

The acceleration in spending may help the world’s largest economy overcome a slowdown in exports and business investment as global growth slackens and concern mounts about the so-called fiscal cliff. At the same time, a drop in saving to finance purchases indicates bigger gains in employment are required to provide the income needed to sustain spending.

“The strength in September gives consumer spending a good lift for the fourth quarter,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “The housing market seems to have turned. Consumers are clearly feeling better and are going out and spending a bit more.”

Equity markets in the U.S. were closed today as Hurricane Sandy barreled toward New York City. Risks posed by the storm, expected to come ashore late today in southern New Jersey and potentially affect 60 million people, were deemed too great to require workers to travel.

Treasuries rose, pushing 10-year note yields to almost a two-week low in an abbreviated trading session, amid concern the storm will disrupt business and hurt the U.S. economic expansion. Trading in bonds will be closed tomorrow.

Treasury Yields

The yield on the benchmark 10-year note fell to 1.72 percent at the 12 p.m. close in New York from 1.75 percent late on Oct. 26.

The storm may subtract as much as 0.2 percentage point from U.S. GDP in the fourth quarter as spending drops on services such as restaurant meals, according to Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. Those types of purchases cannot be made up and may overshadow any boost from a pickup in outlays on rebuilding from the damage, he said.

Globally, retail sales in Spain dropped 11 percent in September from a year ago, and government revenue gains in China moderated, making it more complicated for public outlays to stoke the economy this quarter.

Projections for U.S. consumer spending in the Bloomberg survey ranged from gains of 0.3 percent to 0.8 percent.

The saving rate dropped to 3.3 percent, the lowest since November, from 3.7 percent. Wages and salaries increased 0.3 percent after rising 0.1 percent in August.

Saving Rate

The drop in the saving rate indicates the gain in spending “is not fully sustainable,” said Pierpont’s Stanley. “We’ll see whether the consumer can keep it up.” After the report, Stanley raised his forecast for spending in the fourth quarter to about 2.5 percent from around the 2 percent he previously estimated.

Disposable income, or the money left over after taxes, was little changed in September after falling 0.3 percent after adjusting for inflation.

Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, purchases rose 0.4 percent after a 0.1 percent increase in the previous month, today’s report showed.

Price-adjusted spending on durable goods, including automobiles, climbed 1.3 percent after a 1.5 percent gain. Purchases of non-durable goods, which include gasoline, rose 0.5 percent and services advanced 0.2 percent.

Third-Quarter Growth

The results shed more light on how household spending was faring at the time of the hand-off to the final quarter of 2012.

GDP rose at a 2 percent annual rate from July through September, up from a 1.3 percent pace in the prior quarter, Commerce Department data showed last week. Consumer purchases grew 2 percent, following a 1.5 percent gain.

Companies, on the other hand, are bracing for the fiscal cliff, the $607 billion in spending cuts and tax increases that are slated to take effect automatically next year unless Congress acts.

Corporate spending on equipment and software was unchanged last quarter, the weakest reading in three years, according to the Commerce Department’s data issued last week.

Companies are also cutting forecasts on slowing growth in Europe and Asia. The trade deficit expanded as exports dropped, subtracting 0.2 percentage point from third-quarter growth, last week’s report showed.

Consumer Confidence

Cheaper gasoline, a lower unemployment rate and an improving housing market are lifting Americans’ moods. The Bloomberg Consumer Comfort Index reached a six-month high in the week ended Oct. 21. The Thomson Reuters/University of Michigan final gauge of sentiment advanced to the highest level since September 2007, before the recession began.

Retail sales in September and August had the best back-to-back showing since late 2010 as shoppers snapped up goods from cars to Apple Inc.’s iPhones. Target Corp., the second-biggest U.S. discounter, was among chains whose same-store sales last month topped analysts’ estimates.

Some companies are seeing more caution among customers. Chipotle Mexican Grill Inc., the Denver-based burrito chain, reported third-quarter profit that trailed analysts’ estimates on slowing sales growth.

“We still don’t think the economy is in great shape,” Montgomery Moran, co-chief executive officer, said on an Oct. 18 conference call with analysts. “Consumers seem to be a little bit cautious right now.”

Employment and growth are central themes in the campaigns of President Barack Obama and Republican challenger Mitt Romney ahead of the Nov. 6 elections.

Payroll Forecast

Later this week, the Labor Department may report payrolls advanced by 125,000 in October after rising 114,000 the prior month, according to the Bloomberg survey median. Unemployment rose to 7.9 percent from a three-year low of 7.8 percent, economists predicted.

“Household spending has advanced a bit more quickly,” Federal Reserve policy makers said in a statement on Oct. 24 after their meeting. “Growth in employment has been slow.”

The central bank repeated it would press on with $40 billion in monthly purchases of mortgage-backed securities until the labor market improves “substantially,” and reiterated interest rates are likely to stay near zero “at least through mid-2015.”

An index of inflation tied to spending patterns increased 1.7 percent from September 2011, compared with a 1.5 percent gain in the 12 months ended in August, today’s report showed.

The so-called core price measure, which excludes food and fuel, rose 0.1 percent from the prior month and was also up 1.7 percent over the past 12 months.

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