Washington, Oct. 30 (BUS): US consumers slowed their spending to just 0.6% in September, in a warning sign for an economy still in the grip of the pandemic and a prolonged bout of high inflation, according to the Associated Press (AP) reported.
Meanwhile, the Fed’s key inflation measure rose 4.4% last month from a year earlier — the fastest such increase in three decades. Wages, a key component of inflation, also jumped 0.8% — double August’s gain and a reflection of workers’ growing ability to force desperate companies to fill a near-record number of available jobs. A separate report on Friday showed wages jumped 1.5% in the three months to September, the most in 20-year records.
The sharp rise in prices, partly due to a lack of supplies, has placed an increasing burden on American households. For months, annual inflation has remained well above the modest annual rates of 2% or less that prevailed before the pandemic recession.
Overall, Friday’s report from the Commerce Department showed that personal income, which provides fuel for spending, fell 1% in September, the biggest drop in four months. It happened because the big wage gains were more than offset by the income category that includes government benefits: they fell 7%, reflecting the expiration of emergency federal programs, including expanded unemployment benefits.
The economy, while growing, continues to be hobbled by COVID-19 cases and persistent supply shortages. The government on Thursday estimated the economy slowed sharply to a 2% annual growth rate in the July-September period, the weakest quarterly expansion since the recovery from the pandemic recession began last year.
For the July-September quarter as a whole, consumer spending, which fuels about 70% of overall economic activity, fell to an annual growth rate of just 1.6%. This was a significant decrease from the previous quarter.
Economists are still hoping for a rebound in the current quarter, with fewer confirmed COVID cases, higher vaccination rates, business investing and more Americans venturing into spending money. Many analysts believe the economy will rebound with a robust annual growth rate of at least 4% this quarter.
Workers gained the upper hand in the labor market for the first time in at least two decades, and they receive higher wages, better benefits and other perks such as flexible working hours. With more jobs available than unemployed, government data shows, companies have had to work even harder to attract employees.
Rising inflation is eroding some of the wage increases, but overall wages in recent months have been keeping pace with rising prices. Economists said the 1.5% increase in wages and salaries in the third quarter held out before inflation increased by 1.2% during that period.
In a Friday report on consumer spending, the government said last month’s 0.6% increase represented a slowdown from a 1% gain in August. Purchases of goods slowed to a 0.5% increase in September, compared to a 1.6% increase in August. More Americans are shifting their spending away from the material goods many bought while at home to spending on services, from haircuts to airline tickets to restaurant meals. In some cases, product shortages, linked to choked supply chains, are holding back purchases of goods.
The 12-month increase of 4.4% in the Fed’s preferred rate gauge, the largest since early 1991, reflected a continuation of inflationary pressures that had intensified in recent months. So-called core inflation, which excludes volatile energy and food costs, has risen just under 3.6% over the past year.
Most economists expect consumer spending to increase as supply problems recede. The flexibility of this spending has fueled companies’ need for workers, and in many cases they cannot find enough. In September, employers added just 194,000 jobs, a second tepid gain in a row and a sign that the pandemic continues to grip the economy as many companies struggle to attract job applicants. Many people who have lost their jobs due to the pandemic have yet to start looking again.
Lydia Bosor, chief US economist at Oxford Economics, said she believes consumer spending, which slowed to just 1.6% annual growth in the July-September period, is rebounding in the current quarter.
Bossour wrote that “improving health, increased mobility, improved employment trends and stronger household finances” should help boost consumer spending by about 5% this quarter.
The report on Friday showed that the savings rate fell to 7.5% of after-tax income in September, a level still high but down from 9.2% in August.
AOQ