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Consumer spending in U.S. unexpectedly drops as incomes cool

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(Bloomberg) — Consumer spending in the U.S. unexpectedly dropped in September as incomes rose at the slowest pace of the year, indicating the economy will have difficulty sustaining a pickup in growth into the end of the year.

Expenditures decreased 0.2 percent last month, weaker than any economist projected in a Bloomberg survey, after rising 0.5 percent in August, Commerce Department figures showed today in Washington. Incomes increased 0.2 percent, the smallest gain since December.

Wages that are barely outstripping the pace of inflation may be restraining spending by some households, while slower increases in home prices and volatility in the stock market is also limiting wealth gains. Continued improvement in employment will be needed to further boost confidence and give consumers the means to spend at companies such as Kroger Co., the largest U.S. grocery-store chain.

“The decline was on the heels of a pretty outsized gain in August so some payback should have been expected,” though the size of the pullback was a surprise, said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York and the best forecaster of spending during the last two years according to data compiled by Bloomberg. “The quarter ended on relatively soft footing from a spending perspective, however consumer fundamentals remain fairly sound.”

Shares Surge

Stock-index futures held earlier gains after the report. The contract on the Standard & Poor’s 500 Index maturing in December rose 1 percent to 2,009.1 at 8:50 a.m. in New York, signaling benchmark indexes may rally to new records, as an unexpected boost in stimulus from the Bank of Japan spurred optimism in the global economy.

The median estimate of 81 economists in a Bloomberg survey called for a 0.1 percent gain in spending. Forecasts ranged from a 0.1 percent decrease to a 0.3 percent advance.

The Bloomberg survey median called for incomes to rise 0.3 percent, matching the August reading.

A report today from the Labor Department showed employment costs rose 0.7 percent in the third quarter, more than forecast and matching the increase in the previous three months. The gain was paced by a 0.8 percent advance in wages and salaries that was the biggest since the second quarter of 2008.

Today’s consumption data showed that after adjusting consumer spending for inflation, which generates the figures used to calculate gross domestic product, purchases dropped 0.2 percent last month after a 0.5 percent gain in August.

Spending Breakdown

Spending on durable goods, including automobiles, decreased 1.9 percent after adjusting for inflation following a 2.3 percent gain. Purchases of non-durable goods, which include gasoline and clothing, declined 0.3 percent.

Household outlays on services rose 0.1 percent after adjusting for inflation. In addition to health care, the category also includes categories such as utilities, tourism, legal help and personal care items. This typically makes it difficult for the government to estimate accurately in the preliminary report.

Today’s report gave the monthly breakdown of the third- quarter data issued yesterday. That report showed consumer spending, which accounts for almost 70 percent of the economy, climbed at a 1.8 percent pace after growing at a 2.5 percent rate in the second quarter. The weak reading at the end of the quarter gives consumption little momentum heading into the last three months of the year.

Tame Inflation

Today’s report also showed that prices tied to consumer spending rose 1.4 percent in the year ended September, matching the downwardly revised reading from the prior month. Federal Reserve policy makers aim for increases of 2 percent a year.

Central bankers in the U.S. are taking a sanguine view on the outlook for prices. In announcing their decision to stop pumping money into financial markets, Fed officials this week said inflation in the near term will probably be held down by lower energy prices. They repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”

The core price measure, which excludes fuel and food, rose 0.1 percent in September from the prior month and was up 1.5 percent from a year ago, today’s report showed. Year-over-year gains have held at that level since May.

Confidence Firming

Consumer confidence that rose to a seven-year high this month may underpin spending going forward, as more job security and cheap gas brighten the economic outlook for some households. That bodes well for companies such as Kroger, which said in September that it was also hiring about 20,000 workers for permanent positions as it seeks to keep up with growing demand.

“I think customers are feeling good,” Matt Thompson, Cincinnati, Ohio-based, Kroger’s director of digital and eCommerce, said Oct. 29 at an investor meeting. At the same time, “there is a segment of customers that still have some concern and it’s more of the value of equation for some customers.”

Disposable income, or the money left over after taxes, was little changed in September after adjusting for inflation, the weakest performance this year. It rose 0.3 percent in the prior month and was up 2.5 percent from September 2013.

The saving rate was 5.6 percent last month, compared with 5.4 percent in August.

GDP Strength

Yesterday’s report from the Commerce Department showed the U.S. economy last quarter capped its strongest six months of growth since 2003, as gains in government spending and a shrinking trade deficit made up for a slowdown in household purchases. Gross domestic product grew at a 3.5 percent annualized rate in the three months ended September after a 4.6 percent gain in the second quarter, Commerce Department figures showed today in Washington.

The GDP figures help explain why Fed policymakers felt confident enough to end their bond-buying program this week, while maintaining a pledge to keep interest rates low for “a considerable time.”

“Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the Federal Open Market Committee said in a statement in Washington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that “there remains significant underutilization of labor resources.”

–With assistance from Chris Middleton in Washington.