BUSINESS

US consumer spending rose 0.8 per cent in September, while personal income climbed 0.4 per cent

10/29/2012 09:43 EDT | Updated 12/29/2012 05:12 EST
WASHINGTON - Americans increased their spending in September at twice the rate that 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 per cent in September from August. That followed a 0.5 per cent gain in August and was the best showing since February.

Personal income rose 0.4 per cent, up from a slight 0.1 per cent 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 per cent decline in August.

Consumer spending is important because it drives nearly 70 per cent of economic activity.

A pickup in consumer spending helped lift economic growth in the July-September quarter to a 2 per cent annual rate. While that is faster than the 1.3 per cent 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. The savings rate dropped to 3.3 per cent of after-tax incomes in September, down from 3.7 per cent in August and 4.1 per cent in July.

Americans also paid more for gas in September. That drove an inflation gauge tied to consumer spending up 0.4 per cent last month. But excluding food and energy, prices rose just 0.1 per cent. 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 a revitalized consumer 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.

Republican nominee Mitt Romney is telling voters that President Barack Obama's policies have kept the economy from accelerating. Obama says his policies helped to stabilize the economy after the worst downturn since the Great Depression. He says the economy is slowly recovering under his administration and that Romney is advocating policies that would undo that progress.

The unemployment rate fell to 7.8 per cent last month, the first time it has been below 8 per cent since January 2009, the month Obama took office.