TePORT: Moderate Growth in Spending – In a notable economic shift, US consumer spending showed moderate growth in October, accompanied by the smallest annual increase in inflation in over two and a half years. These indicators of cooling demand have strengthened beliefs that the Federal Reserve might conclude its interest rate hiking campaign.
Data released on Thursday revealed a gradual easing in the labor market. A surge in applications for unemployment benefits was observed last week, with the number on jobless rolls reaching a two-year high in mid-November.
Continuing claims, a measure aligning with anecdotal evidence of declining demand for labor, increased. However, adjusting the data for seasonal fluctuations remains challenging due to the unprecedented surge in unemployment benefit applications at the onset of the COVID-19 pandemic.
Conrad DeQuadros, a senior economic advisor at Brean Capital in New York, noted, “The data this morning provides more ammunition for (Fed Chair Jerome) Powell and others at the Fed who are looking at an extended hold for policy, rather than an additional rate hike to curb inflation pressures.”
Consumer spending, a significant driver of US economic activity, saw a moderate growth in October with a 0.2% increase, following a 0.7% gain in September, according to the Commerce Department’s Bureau of Economic Analysis. This growth, in line with economists’ expectations, reflected a 0.4% rise in outlays on services, partially offset by a 0.2% drop in spending on goods.
The moderation in consumer spending follows a robust growth pace in the third quarter, influenced by higher borrowing costs and depleted excess savings among low-income households. Despite elevated wages, the pace of increase has slowed as the labor market eases.
Millions of Americans resumed student loan repayments last month, potentially impacting spending in the coming year. Personal income rose by 0.2% in October, wages edged up by 0.1%, and the saving rate nudged up to 3.8%.
Amidst concerns that the economy might slide into recession in early 2024, households may become more reluctant to spend and focus on building savings. Despite predictions, the economy grew at a robust 5.2% annualized pace in the third quarter, the fastest in nearly two years.
While growth estimates for the fourth quarter are mostly below 2%, most economists expect the economy to settle into a period of very slow growth, avoiding an outright recession.
The Federal Reserve’s focus on inflation, measured by the personal consumption expenditures (PCE) price index, revealed no change in October after a 0.4% rise in September. The year-on-year gain of 3.0% in October is the smallest since March 2021.
Excluding volatile components, the core PCE price index gained 0.2% in October, with the so-called super core, excluding energy and housing, also rising by 0.1%. The Fed tracks these indexes for monetary policy, with policymakers closely watching the super core PCE price index to gauge progress in combating inflation.
TePORT: Moderate Growth in Consumer Spending in US: Subsiding demand and inflation pressures have fueled optimism that the Fed might be done raising interest rates in this cycle. Financial markets are even anticipating a rate cut in mid-2024. Since March 2022, the central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.
A separate report from the Labor Department showed initial claims for state unemployment benefits increased by 7,000 to a seasonally adjusted 218,000 for the week ended Nov. 25. While claims data tend to be volatile around holidays, the labor market is cooling alongside overall demand in the economy.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased by 86,000 to 1.927 million during the week ending Nov. 18, the highest since November 2021. Continuing claims resumed their upward trend, signaling a shift in the labor market that started in mid-September.
The Fed’s Beige Book report on Wednesday described demand for labor as having “continued to ease,” with most districts reporting “flat to modest increases in overall employment.” It also noted that the “majority of districts reported that more applicants were available.”
Nancy Vanden Houten, lead US economist at Oxford Economics in New York, commented, “We think the claims data are consistent with a job market that is cooling enough to keep any further rate hikes off the table, but still too strong to make rate cuts a consideration any time soon.”
In conclusion, the US economy experienced moderate growth in October, as evidenced by the nuanced dynamics in consumer spending, easing inflation, and a gradually cooling labor market, shaping expectations for the Federal Reserve’s cautious stance on interest rate adjustments.
TePORT: Moderate Growth in Spending
Source: Reuters
