U.S. Consumers Cut Back on Saving in September

Slow income growth led to more spending, less saving last month.

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WASHINGTON (Reuters) — Sluggish income growth led U.S. households to cut back on saving in September to increase their spending, casting doubt on the durability of the economy's growth spurt in the third quarter.

Consumer spending increased 0.6 percent, the Commerce Department said Friday, after a 0.2 percent gain in August.

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Even though the rise in consumer spending -- which accounts for about 70 percent of U.S. economic activity -- came at the expense of saving, analysts say it bodes well for fourth-quarter economic activity even while raising questions about next year's growth.

The outlook was also brightened somewhat by an improvement in consumer confidence and a recovery by the stock market this month, which economists expect to help morale.

The Thomson Reuters/University of Michigan's sentiment index rose to 60.9 this month from 59.4 in September. The preliminary October survey had seen a decline to 57.5.

"The major risk is the decline in the savings rate, which could result in a pullback in spending growth if consumers try to quickly rebuild their savings," said John Ryding, chief economist at RDQ Economics in New York.

Some economists believe the recent stock market rally and improving consumer confidence could ease the pressure on households to replenish saving.

Incomes edged up 0.1 percent last month after falling 0.1 percent in August. Savings dropped at an annual rate of $419.8 billion, the lowest level since August 2009, from $479.1 billion in August.

The saving rate, the percentage of disposable income socked away, fell to 3.6 percent, the slowest since December 2007, from 4.1 percent in August.

A separate report from the Labor Department showed wages and salaries expanded 0.3 percent in the third quarter -- the smallest rise in a year -- after gaining 0.4 percent pace in the prior quarter.

Stocks on Wall Street were marginally lower after a big rally on Thursday, while prices for U.S. Treasury debt and the U.S. dollar rose.

WEAK JOBS MARKET HURTING INCOMES

Sturdy consumer spending contributed to gross domestic product growing at a 2.5 percent annual pace in the third quarter, the fastest rate in a year, after an anemic 1.3 percent rate in the second quarter. Much of the spending data was included in Thursday's GDP report.

But given that income is not driving spending, the economy could lose some of its new found momentum. Consumer spending grew at a 2.4 percent pace in the last quarter, the fastest in nearly a year.

Stubbornly high unemployment, characterized by a jobless rate that has been stuck above 9 percent for five consecutive months, is restraining income growth. Last month, wages and salaries rose 0.3 percent after dipping 0.1 percent in August.

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Inflation-adjusted disposable income slipped 0.1 percent, declining for a third straight month.

But subsiding inflation pressures should offer households some relief. A price index for personal spending rose at a 0.2 percent rate last month, slowing from August's 0.3 percent pace. In the 12 months through September, the PCE index was up 2.9 percent after rising by the same margin in August.

A core inflation measure, which strips out food and energy costs, was flat last month after increasing 0.2 percent in August. In the 12 months through September, core PCE rose 1.6 percent after increasing 1.7 percent in August.

Policymakers at the Federal Reserve, who meet next week to debate additional ways to help the economy and lower an unemployment rate, would like this measure close to 2 percent.