Spending Rises as Savings Fall

Are Americans shopping until they drop again? It could be, judging by the latest government report showing that consumer spending rose by a surprisingly vigorous 0.6 percent in September, even as personal incomes barely grew.  Adjusting for inflation, after-tax income declined slightly by 0.1 percent, according to the Department of Commerce.  The bottom line is a sharp drop in the saving rate in September, to just 3.6 percent.  That’s the lowest level since 2007 and a drop from a healthy five to six percent during most of the last two years.

Scott Hoyt, who studies consumer spending for Moody’s Analytics, says it’s possible that the September numbers may have been inflated by spending for repairs and other things after Hurricane Irene.  At the same time, other data suggest that people are spending more because lenders are suddenly more willing to give credit and as households — which had deferred buying new cars and other goods — feel more optimistic about the direction of the economy.  Consumer spending is perceived as a critical economic component,  and is often cited as representing 70 percent of the nation’s GDP.

The improvement in consumer spending helped boost the economy through the 3rd quarter while policymakers ranging from President Barack Obama to the Federal Reserve took additional action to stimulate growth and hiring.  Unless paychecks grow, Americans may not be able to continue their spending sprees.  “Given the state of consumer sentiment and the savings rate, we should see moderate spending, at best, going forward,” said Sean Incremona, a senior economist at 4Cast Inc., who accurately predicted the consumer spending boom.  “The savings rate is just one of those warning signs that says we’re not pulling ourselves out vigorously, so the economy still has a lot of vulnerability.”

Fed policymakers are considering options for additional monetary easing even as the economy improves.  Vice Chairman Janet Yellen said that a 3rd round of significant asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”

“Consumers today are still facing inflationary pressures on food, high unemployment, minimal job and income growth and waning consumer confidence,” BJ’s Restaurants, Inc., Chief Financial Officer Gregory Levin said after the chain reported a 6.5 percent increase in sales for the 3rd quarter.  “It is difficult to ascertain if the current trends represent the trend we will end up seeing throughout the remainder of this year, or how strong the holiday retail selling season will be.”

“Income growth will have to be watched closely in coming months as the recent trend of spending at the expense of savings is not sustainable,” economists at Nomura Securities wrote.  Inflation rose 0.2 percent in September, based on the latest analysis of the personal consumption expenditure price index.  The PCE (Personal Consumption Expenditures) grew by 2.9 percent over the past year.

“Sluggish growth in U.S. consumer income in September led households to cut back on saving to increase their spending, casting doubts over the durability of the economy’s third-quarter growth spurt,” Reuters wrote.

According to The Hill, “Purchases of new and used cars drove spending.  Clothing sales rose 1.1 percent.  Purchases such as utility payments were up 0.2 percent, as consumers paid to cool their homes during a brutally hot summer.