The drop in fuel prices couldn’t have come at a better time for the U.S. economy.
Consumer spending unexpectedly dropped 0.2 percent in September, weaker than any economist projected in a Bloomberg survey, after rising 0.5 percent in August, according to Commerce Department data issued in Washington. The report also showed incomes rose at a slower pace last month.
“This is a little blip, a bit of payback, but all the numbers are pointing to solid growth between now and the end of the year,” said Nariman Behravesh, chief economist of IHS Inc. in Lexington, Massachusetts, who is among the top-ranked forecasters of consumer spending over the past two years, according to data compiled by Bloomberg. “There are a variety of factors that are playing into it. Better finances for consumers, very good jobs growth and you’ve got more money in consumers’ pockets because of lower gasoline prices.”
The lowest costs at the gas pump in four years and the biggest payroll gains in more than a decade are projected to lift buying power and household purchases heading into the holiday-shopping season. Other reports showed consumer confidence jumped this month to a seven-year high and manufacturing in the Chicago area picked up, bolstering prospects for a rebound.
Stocks jumped, sending benchmark indexes to records, spurred by an unexpected boost in stimulus from the Bank of Japan that stoked optimism global growth will quicken. The Standard & Poor’s 500 Index advanced 1.2 percent to 2,018.05 at the close in New York.
Bank of Japan
Bank of Japan Governor Haruhiko Kuroda pushed through an expansion of what was already an unprecedentedly large monetary-stimulus program. The central bank’s board, in a divided 5 to 4 vote, raised its annual target for enlarging the monetary base.
The European Central Bank also got a reprieve from its struggle to prevent prices from spiraling down as a report showed euro-area inflation accelerated in October from a five- year low.
The U.S. consumer spending data showed that after adjusting for inflation, which generates the figures used to calculate gross domestic product, purchases also dropped 0.2 percent last month after a 0.5 percent gain in August.
The data provided a monthly breakdown of the third-quarter figures issued yesterday. That report showed consumer spending, which accounts for almost 70 percent of the economy, climbed at a 1.8 percent pace after growing at a 2.5 percent rate in the previous three months.
The weak reading at the end of the quarter gives consumption little momentum heading into the last three months of the year. In a research note, economists at JPMorgan Chase & Co. in New York said it will probably be difficult to reach their 2.9 percent spending forecast for the fourth quarter, though they maintained the projection until more data are available.
“The quarter ended on relatively soft footing from a spending perspective, however consumer fundamentals remain fairly sound,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York and the best spending forecaster over the past two years according to data compiled by Bloomberg.
The median estimate of 81 economists in a Bloomberg survey called for a 0.1 percent gain in spending. Forecasts ranged from a 0.1 percent decrease to a 0.3 percent advance.
Consumers’ fortunes took a turn for the better this month. The average price for regular gasoline dropped to $3 a gallon Thursday, the lowest since December 2010, according to AAA, the nation’s largest auto group. It decreased about 33 cents during the month, compared with a 10-cent decline in September.
Payroll gains have averaged 227,000 a month through September. Sustaining such a pace through December would make 2014 the best year for the labor market since 1999.
Attitudes are improving as a result. The Thomson Reuters/University of Michigan final consumer sentiment index for October increased to 86.9, the highest since July 2007, from 84.6 in September. The gain was paced by improving expectations about the economy, which tend to better track spending.
“Consumers have not overreacted to the negative news of a global slowdown or Ebola nor to the positive news of lower gas prices,” Richard Curtain, the Michigan survey’s chief economist, said in a statement. “Instead, consumers have kept their focus on improved job and wage prospects. Finally, five years after the start of the recovery, consumers have begun to adopt the expectations and behaviors that have driven past expansions.”
Manufacturing is also showing no sign of cooling because of slowing global growth. Business activity in the Chicago area expanded in October at the fastest pace in a year, another report showed. The Institute for Supply Management-Chicago Inc.’s business barometer rose to 66.2, the highest since October 2013, from 60.5 in the prior month. Readings greater than 50 signal growth.
One drawback for consumers has been stagnant wage growth. Disposable income, or the money left over after taxes, was little changed in September after adjusting for inflation, the weakest performance this year, the spending report from the Commerce Department also showed. It rose 0.3 percent in the prior month and was up 2.5 percent from September 2013.
Another report was more upbeat about worker pay. Figures from the Labor Department showed employment costs rose 0.7 percent in the third quarter, more than forecast and matching the increase in the previous three months. The gain was paced by a 0.8 percent advance in wages and salaries that was the biggest since the second quarter of 2008.
The pickup in compensation reflected non-salary bonuses and commissions, according to economists at Morgan Stanley in New York. That may mean employers are having to pay more in incentives to attract and retain staff as the job market tightens, economist Ted Wieseman said in a research note.
Kroger Co., the largest U.S. grocery-store chain, is among companies acknowledging there’s a disparity.
“I think customers are feeling good,” Matt Thompson, Cincinnati, Ohio-based Kroger’s director of digital and eCommerce, said Oct. 29 at an investor meeting. At the same time, “there is a segment of customers that still have some concern and it’s more of the value of equation for some customers.”
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