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.
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.
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.
9 Numbers That'll Tell You How the Economy's Really Doing
Consumer Spending Falters, but Wages Make Big Gains
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.