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Economic Report: U.S. consumers spending climbs again, but at the expense of savings

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The numbers: Consumer spending rose a sharp 0.8% in October, suggesting that U.S. households aren’t pulling back despite growing worries of recession.

Spending rose a smaller but still solid 0.5% last month after adjusting for inflation, the government said.

Analysts polled by The Wall Street Journal had forecast a 0.8% increase in consumer spending, by far the biggest engine of the U.S. economy.

Incomes increased 0.7% in October.

Americans have cut back on how much they spend since the end of pandemic benefits. High inflation and rising interest rates are also giving them pause.

But they are still spending enough to keep the U.S. out of recession — for now — by dipping into their savings.

The U.S. savings rate rate fell to 2.3% in October, a sign Americans don’t have a big financial cushion to fall back on. It’s the second lowest savings rate on record going back to 1959.

Big picture:  The economy is heading into rougher waters.

The Federal Reserve has jacked up interest rates to try to tame inflation, but higher borrowing costs also slow the economy. Consumers and businesses are already spending less, and if demand falls sharply enough, unemployment would rise and add to the misery.

Many economists and business leaders predict the U.S. will sink into a recession by next year. Only a steady increase in consumer spending, abetted by a resilient labor market, is likely to prevent that.

Key details: Americans spent more in November on gasoline, largely reflecting an increase in prices at the pump. They also spent more on new cars, dining out and hotel stays.

The increase in incomes is not enough to support all the spending, however, since inflation is running somewhat higher. So Americans are relying on their savings as much as ever.

The rate of consumer inflation using the so-called PCE price index has climbed 6% in the past year. The better known consumer price index has risen 7.7% in the same span.

Looking ahead: “American consumers kicked off the holiday shopping season in high style, with support from brisk income gains, extra savings, and some easing in inflation,” said senior economist Sal Guatieri of BMO Capital Markets. “Until job growth cools, as the Fed is aiming for, don’t expect much slowing in wages or a big pullback in spending.”

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.23%

and S&P 500
SPX,
+0.30%

were set to open higher in Thursday trades.

Market Extra: U.K. pound rallies above $1.22 for first time since summer as market responds to less hawkish Powell

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