WASHINGTON, Oct 29 (Reuters) – U.S. consumer spending rose strongly in September, but was partially affected by higher prices as inflation continued to rise and shortages of cars and other goods persisted amid global supply constraints.
Other data on Friday showed employers boosted compensation by the most in the third quarter as they competed for scarce labor.
Reuters said an industry-wide increase in wages and benefits could undermine Federal Reserve Chair Jerome Powell’s view that higher inflation is temporary.
Strong consumer spending at the end of last quarter and declining coronavirus infections bode well for a rebound in economic activity in the last three months of the year after growth faltered in the third quarter.
“The economy has a supply problem, not a demand problem,” said Christopher Robke, chief economist at FWDBONDS in New York. “The economy has money to burn and that’s why it will be difficult to quell inflation.”
The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.6% last month. August data was revised higher to show a 1.0% spending rebound instead of 0.8% as previously reported.
Economists polled by Reuters had expected consumer spending to increase 0.5 percent. Spending in the past month was driven by demand for services such as healthcare and dining out as well as hotel and hostel accommodations amid a decline in coronavirus cases due to the delta variable.
Spending on services increased 0.6% after advancing 0.7% in August. That offset a 0.2% drop in expenditures on long-term manufactured goods, which largely reflects a drop in new car sales.
The emergence of COVID-19 cases during the summer exacerbated labor shortages in factories, mines and ports, further straining supply chains.
Outside of the shutdown in the spring of 2020, which led to a sharp drop in production, the third quarter was the worst period for auto production since early 2009 due to the global shortage of semiconductors.
Car stocks are declining and some shelves are empty, reducing spending and boosting prices.
Price pressures remained strong in September, reducing the purchasing power of consumers. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, was up 0.2%. This was the smallest gain since February and was followed by a 0.3% rise in August.
In the twelve months through September, the so-called core PCE price index rose 3.6% for the fourth consecutive month. The core PCE price index is the Fed’s preferred inflation measure.
US stocks opened lower as results from giant Apple and Amazon.com reignited concerns about labor and supply shortages. The dollar rose against a basket of currencies. US Treasury rates were higher.
The Fed is expected to announce at next week’s policy meeting that it will start reducing the amount of money it is pumping into the economy through monthly bond purchases.
Consumer spending and inflation data were included in the third-quarter GDP report published on Thursday.
Consumer spending growth stalled to an annualized rate of 1.6% after double-digit gains in the previous two quarters, with expenditures on long-running manufactured goods such as cars collapsing at a 26.2% pace.
This restricted economic growth to a rate of 2.0%, the slowest since the second quarter of 2020, when the economy suffered a historic contraction in the wake of strict mandatory measures to contain the first wave of COVID-19 infections.
Strong inflation pressures were underlined by a separate report from the Labor Department on Friday showing that the employment cost index, the broadest measure of labor costs, rose 1.3% in the third quarter.
The biggest gain since the first quarter of 2001, when the government began tracking the chain, reversed an increase in industries and followed a 0.7% rise in the April-June period.
Labor costs rose 3.7% year over year, the largest rise since the fourth quarter of 2004, after a 2.9% increase in the second quarter.
“While wage increases were initially concentrated in low-wage industries, wage pressures have recently expanded across industries,” said Veronica Clark, an economist at Citigroup New York.
“Upward pressure on wages reaching relatively higher-wage industries would suggest a greater opportunity that higher labor costs, along with higher prices for various other inputs, are passed on through higher consumer prices.”
The ECI is widely viewed by policy makers and economists as one of the best measures of slack in the labor market and an indicator of core inflation because it adjusts to changes in composition and job quality.
Economists had expected the ECI to rise 0.9% in the third quarter.
Wages and salaries rose 1.5% last quarter after a 0.9% increase in the second quarter. It is up 4.2% year over year. Interest gained 0.9% after rising 0.4% in the April-June quarter. The COVID-19 pandemic has turned labor market dynamics upside down, resulting in an acute labor shortage across the economy.
There were 10.4 million jobs at the end of August.
Strong wage growth and ample savings should help support consumer spending and keep the economic expansion going. Although Commerce Department data showed personal income fell 1.0% in September, that largely reflects the expiration of government-funded unemployment benefits.
Wages increased by a steady 0.8% last month. The savings rate fell to 7.5% from 9.2% in August.
NS