LF: Consumer Spending in U.S. Increases 0.8% as Incomes Climb

Consumer spending in the U.S. climbed more than forecast in September as incomes grew, a sign the biggest part of the economy was picking up as the quarter drew to a close.

Household purchases, which account for about 70 percent of the economy, rose 0.8 percent, the most since February, after a 0.5 percent gain the prior month, a Commerce Department report showed today in Washington. The median estimate in a Bloomberg survey of 71 economists called for a 0.6 percent rise. Incomes rose 0.4 percent, the most since March.

The economy expanded at a 2 percent annual pace in the third quarter, helped by a pickup in household purchases as an improving housing market boosted confidence. At the same time, growth remains limited and unemployment elevated, Federal Reserve policy makers said last week, one reason they maintained their plan to buy bonds and keep interest rates low.

“The strength in September gives consumer spending a good lift for the fourth quarter,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “The housing market seems to have turned. Consumers are clearly feeling better and are going out and spending a bit more.”

Equity markets in the U.S. were closed today as Hurricane Sandy barreled toward New York City. Risks posed by the storm, expected to come ashore late today in southern New Jersey and potentially affect 60 million people, were deemed too great to require workers to travel.

Bonds Climb

Treasury securities added to earlier gains after the report, sending the yield on the benchmark 10-year note down to 1.71 percent at 9:03 a.m. in New York from 1.75 percent late on Oct. 26 amid concern that the storm will disrupt business and hurt the economic recovery.

Projections for spending in the Bloomberg survey ranged from gains of 0.3 percent to 0.8 percent.

The saving rate dropped to 3.3 percent, the lowest since November, from 3.7 percent. Wages and salaries increased 0.3 percent after rising 0.1 percent in August.

The drop in the saving rate indicates the gain in spending “is not fully sustainable,” said Pierpont’s Stanley. “We’ll see whether the consumer can keep it up.” Stanley raised his forecast for spending in the fourth quarter after the report to about 2.5 percent from around the 2 percent he previously estimated.

Disposable income, or the money left over after taxes, was little changed in September after falling 0.3 percent after adjusting for inflation.

Inflation Adjusted

Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, purchases rose 0.4 percent after a 0.1 percent increase in the previous month, today’s report showed.

Price-adjusted spending on durable goods, including automobiles, climbed 1.3 percent after a 1.5 percent gain. Purchases of non-durable goods, which include gasoline, rose 0.5 percent and services advanced 0.2 percent.

The results shed more light on how household spending was faring at the time of the hand-off to the final quarter of 2012.

GDP rose at a 2 percent annual rate from July through September, up from a 1.3 percent pace in the prior quarter, Commerce Department data showed last week. Consumer purchases grew 2 percent, following a 1.5 percent gain.

Cheaper gasoline, a lower unemployment rate and an improving housing market are lifting Americans’ moods. The Bloomberg Consumer Comfort Index reached a six-month high in the week ended Oct. 21. The Thomson Reuters/University of Michigan final gauge of sentiment advanced to the highest level since September 2007, before the recession began.

Retail Sales

Retail sales in September and August had the best back-to- back showing since late 2010 as shoppers snapped up goods from cars to Apple Inc.’s iPhones. Target Corp. (TGT), the second-biggest U.S. discounter, was among chains whose same-store sales last month topped analysts’ estimates.

Some companies are seeing more caution among customers. Chipotle Mexican Grill Inc., the Denver-based burrito chain, reported third-quarter profit that trailed analysts’ estimates on slowing sales growth.

“We still don’t think the economy is in great shape,” Montgomery Moran, co-chief executive officer, said on an Oct. 18 conference call with analysts. “Consumers seem to be a little bit cautious right now.”

Employment and growth are central themes in the campaigns of President Barack Obama and Republican challenger Mitt Romney ahead of the Nov. 6 elections.

Payroll Forecast

Later this week, the Labor Department may report payrolls advanced by 125,000 in October after rising 114,000 the prior month, according to the Bloomberg survey median. Unemployment rose to 7.9 percent from a three-year low of 7.8 percent, economists predicted.

“Household spending has advanced a bit more quickly,” Federal Reserve policy makers said in a statement on Oct. 24 after their meeting. “Growth in employment has been slow.”

The central bank repeated it would press on with $40 billion in monthly purchases of mortgage-backed securities until the labor market improves “substantially,” and reiterated interest rates are likely to stay near zero “at least through mid-2015.”

An index of inflation tied to spending patterns increased 1.7 percent from September 2011, compared with a 1.5 percent gain in the 12 months ended in August.

The so-called core price measure, which excludes food and fuel, rose 0.1 percent from the prior month and was also up 1.7 percent over the past 12 months.