U.S. consumer spending increased slightly more than expected in October, suggesting the economy retained much of its solid growth momentum early in the fourth quarter, but progress on lowering inflation appears to have stalled in recent months.
The lack of success in bringing inflation back to the Federal Reserve's 2% target, together with the prospect of higher tariffs on imported goods from the incoming Trump administration, could narrow the scope for interest rate cuts from the U.S. central bank next year.
The Fed is still widely expected to deliver a third rate cut in December, with other data on Wednesday showing more unemployed people were experiencing long bouts of joblessness in mid-November. Minutes of the Fed's Nov. 6-7 policy meeting published on Tuesday showed officials appeared divided over how much farther they may need to cut rates.
"It is a closer call than it was at the prior two policy meetings since core services inflation remains sticky and could lead some Fed officials to argue for a pause in the rate cutting cycle next month," said Kathy Bostjancic, chief economist at Nationwide. "We instead look for the Fed to pause the rate cuts in early 2025 to assess prospective policy changes under the second Trump administration."
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month after an upwardly revised 0.6% advance in September, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast consumer spending would gain 0.3% after a previously reported 0.5% increase in September.
Adjusted for inflation, consumer spending edged up 0.1%, consistent with a roughly 2.5% annualized growth rate this quarter. Spending rose at a 3.5% rate in the July-September quarter, accounting for the economy's 2.8% growth pace.
The Atlanta Fed is forecasting gross domestic product increasing at a 2.7% rate in the fourth quarter.
Spending was largely driven by strong demand for services, including healthcare, housing and utilities, financial services and insurance, dining out and hotel stays as well as transportation and recreation. Services spending rose 0.5%.
Goods outlays were unchanged as an increase in purchases of motor vehicles and parts was offset by lower receipts at service stations because of cheaper gasoline. There were also price-related declines in outlays of apparel, furniture and other long-lasting manufactured household equipment.
Low layoffs, strong household balance sheets thanks to a stock market rally and high home prices after underpinning spending. Household savings also remain lofty. The saving rate increased to 4.4% from 4.1% in September.
Income rose 0.6%, boosted by a 0.5% gain in wages. After accounting for inflation and taxes, income at the disposal of households rose 0.4% after edging up 0.1% in September.
Economists anticipate a fairly busy holiday shopping season, though high prices are squeezing budgets. Data from Adobe Analytics showed consumers have in the first 24 days of November spent $77.4 billion online, up 9.6% on a year-over-year basis. The Mastercard Economics Institute described this holiday shopping season as being characterized by "the value-conscious consumer who feels stretched by economic pressures," and "a confident consumer who feels more free to spend."
Stocks on Wall Street traded lower. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
LOW LAYOFFS
Though inflation is cooling, the trend has slowed. The personal consumption expenditures price index climbed 0.2% in October, matching September's unrevised gain. In the 12 months through October, the PCE price index increased 2.3% after advancing 2.1% in September.
Excluding the volatile food and energy components, the PCE price index rose 0.3%, matching the increase in September. The so-called core inflation was lifted by services, mainly housing and utilities, transportation, as well as financial services and insurance. Goods prices fell. Core inflation increased 2.8% year-on-year in October after climbing 2.7% in September. The central bank tracks the PCE price measures for monetary policy.
"Disinflation through the import channel on goods has driven down inflation over the past two years," said Joe Brusuelas, chief economist at RSM. "But higher goods costs are most likely on the way, and that increase will also result in higher service-sector costs."
In the near-term, however, labor market slack could outweigh concerns about higher inflation readings.
A separate report from the Labor Department showed initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 213,000 for the week ended Nov. 23, the lowest level since April.
Claims have reversed the surge in early October, which was the result of hurricanes and strikes at Boeing (BA.N) and another aerospace company. Despite expectations for a rebound in nonfarm payrolls, the unemployment rate is likely to be unchanged or even rise this month.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 9,000 to a seasonally adjusted 1.907 million during the week ending Nov. 16, the highest level since November 2021, the claims report showed.
The so-called continuing claims data covered the period during which the government surveyed households for November's unemployment rate. They increased between the October and November survey periods, indicating that many laid-off workers are finding it difficult to land new jobs.
The jobless rate has held steady at 4.1% for two straight months. The employment report for November would be crucial for the Fed's rate decision next month. Financial markets expect a 25-basis-point rate cut at the Fed's Dec. 17-18 policy meeting.
The central bank reduced rates by 25 basis points earlier this month, lowering its benchmark overnight interest rate to the 4.50%-4.75% range. It initiated its policy easing cycle in September, which marked its first reduction in borrowing costs since 2020, after hiking rates by 525 basis points in 2022 and 2023 to quell inflation.
While consumers continued to steer the economy, business spending on equipment appeared to soften.
A third report from the Commerce Department's Census Bureau showed non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dropped 0.2% in October after a 0.3% gain in September.
"We see little growth in investment this quarter, with the possibility that spending could decline outright," said Abiel Reinhart, an economist at J.P. Morgan.
