US economy grows 2.8% powered by consumer spending

Washington — The US economy expanded at a solid pace in the third quarter as consumer spending increased, but progress lowering inflation appears to have stalled in the past months

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4% in October after an upwardly revised 0.6% advance in September, the commerce department’s Bureau of Economic Analysis reported on Wednesday.

Economists polled had forecast consumer spending gaining 0.3% after a previously reported 0.5% increase in September.

The economy grew at a 2.8% pace in the July-September quarter. The Atlanta Federal Reserve estimates GDP will rise at a 2.6% annualised rate this quarter. 

Consumption is being largely underpinned by low layoffs, with additional help from strong household balance sheets thanks to a stock market rally and high home prices.

Household savings also remain lofty. Economists expect a fairly decent holiday shopping season, despite high prices continuing to squeezing budgets.

Though inflation is cooling, there appears to not have been much progress in recent months bringing it down to the Federal Reserve’s 2% target. The personal consumption expenditures (PCE) price index climbed 0.2% in October, matching September’s unrevised gain. In the 12 months through October, the PCE increased 2.3 after advancing 2.1% in September.

Excluding the volatile food and energy components, the PCE rose 0.3% after a similar increase in September.

In the 12 months through October, core inflation increased 2.8% after climbing 2.7% in September. The US central bank tracks the PCE price measures for monetary policy.

There are concerns that inflation could rise next year if US president-elect Donald Trump pushes ahead with some of his campaign promises, including raising tariffs on imported goods, and narrow the path for interest rate cuts next year.

Trump said on Monday he would impose a 25% tariff on all products from Mexico and Canada, and an additional 10% tariff on goods from China, on his first day in office.

The Fed reduced rates by 25 basis points (bps) earlier this month, lowering its benchmark overnight interest rate to the 4.50%-4.75% range.

It kicked off its policy easing cycle in September, its first reduction in borrowing costs since 2020, after hiking rates by 525bps in 2022 and 2023 to quell inflation.

Reuters