Consumer spending beat expectations in September as underlying inflationary pressures continued to build, bolstering the Federal Reserve’s case for a fourth straight rate hike last week.

The Commerce Department said Friday that Americans increased their spending by 0.6% last month as household income rose just 0.4% and the savings rate fell, both ‘indications that households are being strained by consumer prices which rose 6.2% from the previous year.

The new data suggests U.S. consumers are in “a period of transition” as the domestic economy continues to reel from the pandemic and continues to grow despite the Fed’s efforts to slow it down, said Gus Faucher, chief economist at the PNC bank.

Bank of America CEO Brian Moynihan put it this way: “If you raise rates and slow the economy to fight inflation, you expect consumer spending to slow down,” he said. he told CNBC. “It hasn’t happened yet.”

The economy grew at an annualized rate of 2.6% in the three months ending in September, the Commerce Department said earlier in the week, after shrinking slightly in the first and second quarters.

Persistently high inflation, near its worst in four decades, has intensified pressure on the Fed to continue to aggressively raise its main short-term interest rate in an attempt to rein in rising prices. . Last month, the Fed raised its key rate by a substantial three-quarters of a point for the third time in a row, and this week it is expected to do so for the fourth time.

The rapid increases raise the risk of a recession, which many economists expect next year. But consumers continue to spend.

Wage increase

Higher wages help maintain spending for many workers. Wages and benefits rose 5% in the July-September quarter from a year ago, the government said. It was a healthy gain, just below a two-decade high of 5.1% in the April-June quarter.

With all that, spending on services rose 0.8% in September, Faucher noted, while spending on nondurable goods — defined by the Commerce Department as those with a lifespan of less than three years — only increased by 0.2%. This suggests that consumers are feeling the pain of inflation but are nonetheless intent on enjoying the experiences. Overall consumer spending rose 0.6%.

“After the stimulus and low interest rates boosted household spending in 2021 and early 2022, particularly spending on goods, spending growth is slowing to a more sustainable pace,” Faucher said. “Furthermore, real spending on goods is falling, given that households have already purchased a lot of goods over the past two years. But spending on services continues to rise as consumers venture more.

That matches what economists have predicted for major events, including the World Series between the Houston Astros and Philadelphia Phillies, which began Friday night at Minute Maid Park.

Ray Perryman, CEO of economic advisory firm Waco Perryman Group, expects this year’s series to have an economic impact of at least $55 million for the Houston area, and local business owners. reported an increase in revenue through the playoffs, after a summer that some of them described as slower than usual.

Consumers are also opening their wallets for Halloween spending. The National Retail Federation said 69% of Americans plan to celebrate the holiday today with total spending reaching $10.6 billion, up from $10.1 billion a year ago.

housing market

The Fed hikes have resulted in much higher lending rates for businesses and consumers, especially for mortgages. The average 30-year fixed mortgage rate topped 7% last week, according to Freddie Mac, the highest level in two decades and more than double what it was a year ago.

Rapidly rising borrowing costs crushed the housing market. Existing home sales have fallen for eight consecutive months and have fallen nearly 25% in the past year. Sales and construction of new homes are also down. In San Antonio, September home sales were down 13% from a year earlier, while new home construction fell 20% in the third quarter.

A weaker housing market slowed the economy as lower home purchases also led to lower sales of furniture, appliances and home improvement equipment.

Home prices, which have skyrocketed during the pandemic, have started to decline as a result. The S&P Case-Shiller home price index fell from July to August for a second consecutive month, according to the latest available data. In San Antonio, median sale prices have fallen for five consecutive months.

But those declines have yet to show up in government measures of housing costs, which include rents and continue to rise for many people as they renew their leases. In San Antonio, rents fell 0.6% between the second and third quarters, but are still up more than 5% from a year ago.

It could take until late spring or summer before falling house prices trickle down to government inflation indices. This delay could prevent official measures of inflation from falling much over the next few months.

Writers Erica Grieder and Madison Iszler and The Associated Press contributed to this report.

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