Consumer Spending Falters, but Wages Make Big Gains

Consumer Spending
Matt Rourke/AP

By Lucia Mutikani

WASHINGTON -- U.S. consumer spending fell for the first time in eight months in September, but a rise in consumer sentiment to more than a seven-year high this month indicated economic growth would remain on solid ground.

The economic picture also received a boost from other data Friday showing factory activity in the Midwest accelerated sharply in October, while wages in the third quarter recorded their largest increase in more than six years. Strong wage growth has been the missing piece of the recovery puzzle.

"The fundamentals of the economy remain very strong, the conditions are in place for continued above-trend growth," said Gus Faucher, a senior economist at PNC Financial Services in Pittsburgh.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, declined 0.2 percent last month, the first drop since January, after a 0.5 percent increase in August, the Commerce Department said.

%VIRTUAL-WSSCourseInline-876%The weak end to the third quarter suggested consumer spending could slow early in the October-December period, and chip at the economy's momentum. The economy grew at a 3.5 percent annual pace in the third quarter.

But with consumer sentiment this month hitting its highest level since July 2007, wage growth starting to pick up and gasoline prices at a near four-year low, the broad-based drop in consumption is likely to be temporary.

The Thomson Reuters/University of Michigan's index on consumer sentiment rose to 86.9 in October from 84.6 last month, a separate report showed.

Another report from the Labor Department showed its Employment Cost Index, the broadest measure of labor costs, increased 0.7 percent after rising by the same margin in the second quarter.

Wages and salaries, which account for 70 percent of employment costs, rose 0.8 percent in the third quarter, the largest increase since the second quarter of 2008. They had gained 0.6 percent in the second quarter.

U.S. Treasury debt prices fell on the mixed data, while the dollar rallied to its highest level since June 2010 against a basket of currencies. U.S. stocks were trading sharply higher.

Wages Rising

Various business surveys have been hinting at an acceleration in wage growth. The third-quarter increase in wages and salaries is a welcome sign for the labor market.

"This first sign of rising wage pressure in hard data releases corroborates the Federal Reserve's more sanguine assessment of the labor market," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

"If sustained, which we expect, it will further strengthen the Fed's commitment to continue its policy normalization path, and to eventually raise rates."

Fed officials on Wednesday gave a fairly upbeat assessment of the labor market, dropping their characterization of labor market slack as "significant" and replacing it with "gradually diminishing."

Weak consumption is keeping a lid on inflation. A price index for consumer spending edged up 0.1 percent after slipping 0.1 percent in August. In the 12 months through September, the personal consumption expenditures, or PCE, price index rose 1.4 percent for a second straight month.

Excluding food and energy, prices rose 0.1 percent for a third consecutive month. The so-called core PCE price index increased 1.5 percent in the 12 months through September.

Both price measures continue to run below the U.S. central bank's 2 percent inflation target.

-Additional reporting by Chuck Mikolajczak in New York.

Originally published