WASHINGTON – Americans increased their spending in September at twice the rate their income grew, a sign of confidence in the economy. Still, consumers made up the difference by saving less for a third straight month, a troubling trend.
The Commerce Department said Monday that consumer spending increased 0.8 percent in September from August. That followed a 0.5 percent gain in August and was the best showing since February.
Personal income went up 0.4 percent, an improvement from a slight 0.1 percent gain in August and the best gain since March. However, after adjusting for inflation and taxes, income was flat in September. That followed a 0.3 percent decline in August.
Consumer spending is important because it drives nearly 70 percent of economic activity.
A pickup in consumer spending helped lift economic growth in the July-September quarter to a 2 percent annual rate. While that is faster than the 1.3 percent rate in the April-June period, it’s still too weak to create enough jobs to rapidly lower the unemployment rate.
Paul Dales, senior U.S. economist at Capital Economics, said weak income growth would likely hold back spending in the coming months. Consumers can only cut their savings by so much, he cautioned. And if Congress fails to reach a budget deal by the end of the year, taxes will rise in January. That could also dampen consumer spending.
“Faced with the prospect of major tax hikes in the New Year, [consumers] will soon become more cautious,” Dales said.
The spending gain in September reflected, in part, rising consumer confidence. The University of Michigan reported Friday that its final consumer sentiment index for October had hit a five-year high. Falling gas prices and a slightly better job market were credited with lifting consumers’ outlook.
Still, households trimmed their savings to finance the increase in purchases, Monday’s report showed.
Americans also paid more for gas in September. That drove an inflation gauge tied to consumer spending to rise 0.4 percent last month. But excluding food and energy, prices rose just 0.1 percent. And gas prices have dropped since then, which could encourage more spending elsewhere.
With eight days until the election, the economy is being kept afloat by revitalized consumers and the early stages of a housing recovery. The nation continues to struggle because businesses are reluctant to invest, and slower global growth has cut demand for American exports.