U.S. Consumer Spending Accelerates; Inflation Subsides

U.S. consumer spending increased solidly in October, while inflation pressures moderated, giving the economy a powerful boost at the start of the fourth quarter as it faces rising headwinds from the Federal Reserve's aggressive monetary policy tightening.

The labor market, the economy's other pillar of support, continues to show resilience. The number of Americans filing new claims for unemployment benefits declined last week, almost unwinding the prior week's jump, which had lifted claims to a three-month high.

The reports raised cautious optimism the economy could avoid an anticipated recession next year and that if there was a downturn, it would be short and mild. Fed Chair Jerome Powell said on Wednesday the U.S. central bank could scale back the pace of its interest rate hikes "as soon as December."

The Fed is in the midst of the fastest rate-hiking cycle since the 1980s.

"The consumer is alive and well," said Christopher Rupkey, chief economist at FWDBONDS in New York. "Right now, even if consumers do not buy anything more in November and December, real consumer spending is running well above normal and in no way, shape or form looks like a recession."

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.8% after an unrevised 0.6% increase in September, the Commerce Department said. October's gain was in line with economists' expectations.

Consumer bought motor vehicles, furniture and recreational goods. They also dined out and spent more on housing and utilities. Spending was boosted by wage gains amid labor market resilience, one-time tax refunds in California, which saw some households receiving as much as $1,050 in stimulus checks, and cost of living adjustments for food stamp recipients.

Personal income increased 0.7%, the most in a year. With inflation subsiding, income at the disposal of households after accounting for inflation rose 0.4%.

But consumers also tapped into their savings to fund their purchases. The saving rate dropped to 2.3%, the lowest since July 2005, from 2.4% in September.

The Fed's intention to scale back the pace of its rate hikes got a boost from the retreat in inflation. The personal consumption expenditures (PCE) price index rose 0.3% after advancing by the same margin in September.

In the 12 months through October, the PCE price index increased 6.0%. That's the smallest year-on-year gain since December 2021 and followed a 6.3% advance in September.

Excluding the volatile food and energy components, the PCE price index rose 0.2% after gaining 0.5% in September. The so-called core PCE price index climbed 5.0% on a year-on-year basis in October after increasing 5.2% in September.

U.S. stocks were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices were mixed.

TIGHT LABOR MARKET

The Fed tracks the PCE price indexes for its 2% inflation target. Other inflation measures have shown signs of slowing. The annual consumer price index increased less than 8% in October for the first time in eight months.

The Fed has raised its policy rate by 375 basis points this year from near zero to a 3.75%-4.00% range.

Though demand for workers is slowing, the labor market remains tight. A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits dropped 16,000 to a seasonally adjusted 225,000 for the week ended Nov. 26. Claims had jumped to 241,000 in the prior week.

While some of the rise likely reflected a surge in layoffs in the technology sector, claims also tend to be volatile at the start of the holiday season as companies temporarily close or slow hiring.

Economists had forecast 235,000 claims for the latest week.

The Fed's Beige Book on Wednesday reported "scattered"

layoffs in November in the technology, finance, and real estate sectors, but noted that "some contacts expressed a reluctance to shed workers in light of hiring difficulties, even though their labor needs were diminishing."

Technology layoffs helped to boost job cuts announced by U.S-based companies in November, a third report from global outplacement firm Challenger, Gray & Christmas showed on Thursday. Planned job cuts surged 127% to 76,835 last month.

The technology sector announced 52,771 layoffs, the largest since 2000. There were also notable increases in the automotive, consumer products, construction, healthcare products and transportation industries.

Employers have announced 320,173 job cuts this year, up 6% compared to the same period in 2021. Still, the year-to-date total is the second lowest on record.