Shoppers’ Mood Rises as Gas Falls
Consumer spending slipped in August but falling gasoline prices elevated shoppers’ moods by September and Midwest factory activity picked up as well, according to reports Friday that suggested the economy was still motoring along.
Consumer prices outside food and energy edged up just 0.2% in August, although year-over-year price gains hit an 11-year high, offering a mixed reading on inflation.
The University of Michigan’s closely watched consumer sentiment index rose to 85.4 in September, up from 82.0 in August and the highest since April.
Analysts tied the improvement to the demise of $3-a-gallon gasoline that dogged Americans for much of the summer, as well as a well-publicized trek toward record highs in key stock indexes.
“I am not surprised that the consumer confidence is a little bit better than expected because people are seeing pump prices of gasoline come down,” said James Glassman, chief U.S. economist at JP Morgan Chase & Co. in New York. “It doesn’t tell you much about their spending power.”
The Commerce Department said real consumer spending in August fell for the first time since September 2005. Inflation-adjusted spending fell surprisingly by 0.1%, the first decline since a 0.3% drop in September 2005.
“It seems that consumer spending is winding down but will probably do a little better between now and the end of the year due to the drop in gasoline prices,” said Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C.
Wage and salary income edged up 0.1%. The personal saving rate improved to a negative 0.5% but it was nevertheless the 17th consecutive negative reading in that category.
A key indicator of business conditions in the Midwest, the National Assn. of Purchasing Managers-Chicago index, jumped unexpectedly to 62.1 in September from 57.1, surpassing even the most optimistic forecasts. Economists on average had expected a small decline.
A reading above 50 on the index shows expansion in the Midwest economy, and one above 60 suggests much stronger growth than a number of other regional surveys recently.
The Commerce Department said core consumer prices rose 0.2% in August, as expected. But the year-over-year rate of nonfood, nonenergy inflation rose to 2.5%, the highest since April 1995, and well above the 1% to 2% seen as a “comfort zone” by some Federal Reserve officials.
“It reinforces the Fed’s view that the risk is still tilted toward higher inflation,” said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla.
Short-term rate futures still suggest that the Fed will hold interest rates steady through year-end as it balances uncertain growth prospects with higher-than-desired inflation. Anecdotally, Americans sense that inflation is coming down, if slowly. The Michigan survey’s forecast of five-year inflation fell to 3% in September from August’s 3.2%.
“It looks like the worst of the inflation news may be behind us, but there is always the prospect of surprises,” said William Poole, president of the Federal Reserve Bank of St. Louis.
