U.S. consumer spending barely rose in October as households took advantage of rising incomes to boost savings to their highest level in nearly three years, pointing to moderate economic growth in the fourth quarter.
Anemic consumer spending did little do change expectations that the Federal Reserve will raise interest rates next month as other data on Wednesday showed a surge in business spending plans in October and a drop in new applications for unemployment benefits last week.
“As far as fourth-quarter GDP goes, that is likely to keep estimates close to 2 percent. That’s enough to justify a rate hike as long as next Friday’s employment report is not a disaster,” said Chris Low, chief economist at FTN Financial in New York.
The Commerce Department said consumer spending edged up 0.1 percent after a similar increase in September. That suggests consumer spending, which accounts for more than two-thirds of U.S. economic activity, has slowed from the third quarter’s brisk 3.0 percent annual pace.
Economists say rising rents and medical costs are diverting money from discretionary spending. While consumer sentiment increased in November from October, households continued to fret over their financial prospects, another report showed.
But as the labor market continues to tighten, there is optimism that wage growth will pick up and encourage consumers to loosen their purse strings and boost spending.
Strengthening labor market conditions are gradually lifting income. The Commerce Department said personal income increased 0.4 percent last month after rising 0.2 percent in September. Wages and salaries shot up 0.6 percent, the largest gain since May.
Savings increased to $761.9 billion, the highest level since December 2012, from $722.9 billion in September. Higher savings could over time buoy consumer spending.
There was still no sign of inflation, which has persistently run below the Federal Reserve’s 2 percent target.