Americans spend but inflation casts a shadow over the economy
Washington Americans do the main thing that drives the American economy – spending – but the accelerating inflation casts a shadow over it.
A batch of economic data released on Wednesday showed the economy standing on solid foundations, with Americans’ incomes rising and unemployment claims falling to a level not seen since the Beatles were still together.
However, a sharp rise in the price of everything from gas to rent is likely to be the main economic indicator Americans discuss during Thanksgiving dinner.
The Commerce Department reported that US consumer spending rebounded 1.3% in October. That was despite inflation, which has accelerated faster over the past year than at any time in more than three decades.
The jump in consumer spending last month was double its 0.6% gain in September.
Meanwhile, consumer prices are up 5% from the same period last year, the fastest gain in 12 months since the same extension that ended in November 1990.
“Although consumer confidence waned in the fall due to higher inflation, households continue to spend,” said Jos Foucher, chief economist at PNC Financial.
Personal income, which provides fuel for increased spending in the future, rose 0.5% in October after declining 1% in September, reflecting a decline in government support payments.
Wages to Americans have been on the rise with companies desperate for workers, and government stimulus checks earlier this year further lining their bank accounts. This bodes well for a strong holiday season and major US retailers say they are ready after some companies, such as Walmart and Target, have gone to great lengths to make sure their shelves are full despite widespread shortages.
Analysts said the strong increase in spending in October, the first month in the new quarter, was encouraging evidence that overall economic growth, which slowed to a modest annual rate of 2.1% in the July-September quarter, will mark a significant recovery in the current quarter. This is to be expected as long as the recent rise in COVID cases and concerns about inflation do not discourage holiday shopping.
Gregory Daco, chief US economist at Oxford Economics, wrote in a note to clients. Daco expects GDP to rebound in the current October-December period to a growth rate of 5.6%.
Meanwhile, the number of Americans filing for unemployment benefits last week fell by 71,000 to 199,000, the lowest level since mid-November 1969. But seasonal adjustments around the Thanksgiving holiday contributed significantly to the larger-than-expected drop. Unadjusted, claims actually increased by more than 18,000 to nearly 259,000.
In a cautionary note on Wednesday, the University of Michigan reported that its consumer confidence index fell 4.3 percentage points to a reading of 67.4 this month, its lowest level since November 2011, weighed down by inflation concerns.
And there are areas in the United States that are seeing a spike in COVID-19 cases that could get worse as families travel into the country for the Thanksgiving holiday.
President Joe Biden acted on Tuesday to counter rising gasoline prices by ordering the release of the nation’s strategic oil reserves, but economists expect the move to have only a minimal impact on rising gas prices.
The Fed seeks to implement interest rate policies to achieve annual gains in its preferred price index of around 2%. However, over the past two decades, inflation has consistently failed to reach the Federal Reserve’s 2% inflation target.
Federal Reserve officials at their meeting in November announced the start of a reduction in its $120 billion per month bond purchases that the central bank had been making to put downward pressure on long-term interest rates in order to stimulate the economy.
The minutes showed that Fed officials are increasingly concerned that unwanted price pressures may persist for much longer. Officials indicated that the Fed should be prepared to move to reduce its bond purchases more quickly – or even start raising the Fed’s benchmark interest rate soon – to make sure inflation does not get out of control.
The drop in bond purchases was the Fed’s first maneuver to undo the massive support it was giving the economy. Economists expect this to be followed in the second half of 2022 by an increase in the Federal Reserve’s benchmark interest rate, which affects millions of consumer and business loans. That rate has been at a record low of 0% to 0.25% since the pandemic hit in the spring of 2020.
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