U.S. Economy: Inflation-Adjusted Spending Declines Back to Back Months -First Time in 15 Years
Oct. 31 (Bloomberg) -- U.S. consumer spending dropped for a second month in September when adjusted for inflation, the first back-to-back decline in 15 years and a sign that rising fuel costs left Americans with less money for other purchases.
Personal spending adjusted for inflation, which strips away the rise in energy prices, fell 0.4 percent after falling 1 percent in August, the Commerce Department said today in Washington. Before the adjustment, spending rose 0.5 percent last month after a 0.5 drop in August. Incomes rebounded from a plunge in August caused by uninsured losses from Hurricane Katrina.
Slower consumer spending, which accounts for about two-thirds of the economy, may be offset by a pickup in manufacturing, economists said. The National Association of Purchasing Management- Chicago's Business Barometer unexpectedly rose in October, as orders increased and backlogs reached the highest in a year.
''We should see continued consumer weakness in October and November, while industry overall does quite well,'' said Haseeb Ahmed, an economist at J.P. Morgan Chase in New York, which now expects fourth-quarter spending to rise at a 1.5 percent annual rate, the slowest since the final three months of 2002. ''The soft trajectory going into the fourth quarter has adverse implications.''
The inflation-adjusted figures, which are used to calculate gross domestic product, suggest rising oil and natural gas prices left consumers with less to spend on restaurants, clothing and entertainment late last quarter. The Federal Reserve policy makers, poised to raise interest rates tomorrow to cut the risk of broader inflation, say they expect only a temporary slowdown.
Incomes and Spending
Today's Commerce Department report showed incomes bounced back in September because uninsured losses from Katrina in August were revised to $240 billion from $100 billion at an annual pace. Losses not covered by insurance fell to $5 billion in September.
Economists surveyed by Bloomberg News expected spending to rise 0.5 percent before the inflation adjustment. Incomes were forecast to rise 0.3 percent. Excluding the effects of the hurricanes, personal income rose 0.5 percent in September after increasing 0.3 percent in August.
''Consumer spending was really slowing down a lot in August and September,'' said Kevin Logan, senior market economist at Dresdner Kleinwort Wasserstein in New York. ''We're entering the fourth quarter on a weak note.''
Personal consumption increased 3.9 percent at an annual rate in the third quarter after a 3.4 percent pace in the prior three months, the government's latest GDP report showed Oct. 28. That report was the first of three government estimates for the period.
Manufacturers
Manufacturers may step in to help bridge the gap left by consumers. The Chicago purchasing managers' report, which gives investors clues about trends in U.S. manufacturing, rose to 62.9 this month from 60.5 in September. Numbers higher than 50 signal growth. The Chicago index was expected to fall to 57.4 this month, based on the median forecast.
''Inventories will be rebuilt for some months to come and that will bolster economic growth going forward,'' said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, whose forecast of 60.5 was the highest in the Bloomberg survey.
U.S. 10-year Treasuries rose as some traders said gains in incomes and manufacturing weren't strong enough to extend a slump that last week pushed the notes down by the most since March. The benchmark note rose 1/32 point, pushing the yield down 1 basis point to 4.56 percent at 2:06 p.m. in New York.
''When the heating bills hit, retail activity could become problematic,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. ''We are setting up for a slow fourth quarter.''
Saving Rate
Because spending rose less than incomes, the saving rate improved to minus 0.4 percent from minus 1 percent the previous month. The rate weighs income from wages, salaries, dividends, businesses and government payments against spending. It doesn't take into account borrowed money, income from investments or rising home prices. Increasing wealth from rising home values and higher stock prices has added to incomes and supported spending.
Consumers' penchant for spending more than they earn, even amid higher energy prices, is one reason not to worry about the slowdown in inflation-adjusted sending, some economists said.
Consumers have ''taken these hits and continued to spend more than they make, and if that trend continues, assuming any correction in energy prices, the economy is going to remain strong,'' said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado.
Incomes rose 6.3 percent in September from the same month last year, paced by a 6 percent gain in wages and salaries. Disposable income, or the money left over after taxes, increased 1.9 percent in September following a 1.1 percent decline in August and was up 5.3 percent in the last 12 months.
Inflation Gauge
The report's price gauge tied to spending patterns and excluding food and energy costs, Fed policy makers' preferred inflation measure, rose 0.2 percent last month and was up 2 percent from September 2004. This compares with a 0.1 percent increase in a similar measure in the consumer price index.
The Fed in July predicted the price index would rise 1.75 percent to 2 percent this year. Prices including food and energy rose 0.9 percent last month, the biggest gain since February 1981, and were up 3.8 percent in the last 12 months.
The Fed's preferred price gauge, calculated quarterly, rose at a 1.3 percent annual rate in the third quarter, the slowest pace since mid-2003, the Commerce Department said Oct. 28.
Fed Policy
Federal Reserve Governors Donald Kohn and Roger Ferguson Jr., and Fed bank presidents Jack Guynn of Atlanta, Janet Yellen of San Francisco, Sandra Pianalto of Cleveland and Richard Fisher of Dallas, all said this month that the U.S. central bank must guard against rising prices. Economists expect the Fed to raise its benchmark-lending rate for a 12th straight time on Nov. 1.
''With gasoline at or near $3 a gallon recently, and other energy costs such as natural gas almost doubling in the past year, consumers may face tough choices in how they allocate their spending,'' Guynn said Oct. 20.
Spending may stay under pressure as consumers grow wary of the economic outlook. Consumer confidence in October fell to the lowest level in 13 years as high energy bills prompted households to cut back on other spending, according to the University of Michigan's sentiment index released Oct. 28.
Gross Domestic Product
Economists surveyed by Bloomberg say consumer spending will slow to 2.2 percent in the fourth quarter as households feel the pinch from elevated energy costs. Consumer spending grew at a 3.9 percent annual pace in the third quarter, compared with 3.4 percent the prior quarter, the Commerce Department said today.
The U.S. economy grew at a more-than-expected 3.8 percent pace in the third quarter, compared with 3.3 percent in the previous three months, Commerce said.
Spending on big-ticket items probably slowed the most in September, economists said. Automakers sold cars and light trucks at an annual rate of 16.4 million units last month, according to Bloomberg data, down from 16.8 million in August and 20.9 million in July, when General Motors Corp. and Ford Motor Co. offered employee discounts to all buyers.
Auto Sales
''Although we expect consumer spending to slow sharply in the fourth quarter, to below 2 percent, as a result of lower auto sales, we expect that GDP will still edge back above 4 percent on an inventory rebound, higher business spending, and hurricane recovery spending,'' John Ryding, chief U.S. economist at Bear, Stearns & Co. in New York, wrote in a report.
RadioShack Corp., the third-largest U.S. electronics chain, on Oct. 21 cut its earnings forecast for the year on slowing sales of wireless phones.
''There is a reason, obviously, to be prudent as we go into the fourth quarter,'' David Edmondson, RadioShack's chief executive, said in an interview Oct. 21 from Fort Worth, Texas. With ''$3 dollar gas prices and low consumer confidence, I think it's prudent to be more conservative.''
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