Consumers shrugged off sagging home prices and financial market turmoil in August to push up spending by a better-than-expected amount.
In other good news, a key inflation gauge showed price pressures outside of food and energy eased further last month and construction activity rose, thanks to continued strength outside of housing.
The batch of new reports yesterday offered some reassurance that the current economic expansion may not be derailed by the continued troubles in housing and the severe credit crunch that roiled financial markets last month. Consumer spending, which accounts for two-thirds of total economic activity, is considered the key to whether the country avoids a recession.
The Commerce Department reported that consumer spending rose by 0.6 percent in August, the best showing in four months and better than the 0.4 percent increase that had been expected. Inflation-adjusted spending was also up 0.6 percent, the best showing for this measure in 10 months.
“So far, the housing and credit problems have not dented the consumer’s armor,” said Joel Naroff, chief economist at Naroff Economic Advisors. “This was a good report as household spending stayed up while inflation came down.”
An inflation gauge tied to consumer purchases showed prices excluding food and energy rose by just 1.8 percent in August, compared to a year ago.
That was the slowest year-over-year price increase since February 2004. It marked the third straight month that core inflation has been inside the Fed’s comfort zone of 1 percent to 2 percent increases.
The Fed last week cut a key interest rate by a bolder-than-expected half point in an effort to ward off a recession, a reversal from the stance they took at their previous meeting in August when they had continued to insist that inflation, not economic weakness, remained the economy’s biggest threat.
While many economists think the Fed will cut rates again in October, some analysts said that reduction may be a smaller quarter-point move because the spending report had shown unexpected strength.
The 0.6 percent gain in spending was accompanied by a 0.3 percent rise in incomes, slightly lower than had been expected.
Analysts blamed that weakness on the fact that employers cut 4,000 jobs last month, the first monthly job loss in four years.
The report on construction spending showed a 0.2 percent increase in August, an unexpected surprise given the expectation that construction activity had been expected to drop by 0.2 percent during the month because of the continued troubles in housing.
Housing activity was down for an 18th consecutive month, falling by 1.5 percent, as the housing industry remains in a severe downturn and builders have been slashing production in an effort to get inventories under control. Reports earlier this week showed that sales of both existing and new homes were down sharply in August with the median price of a new home falling 7.5 percent from a year ago, the biggest decline in 37 years.
The weakness in housing construction in August was offset by gains in areas outside of housing. Construction of office buildings, shopping centers and government projects all showed strong gains.
The overall economy expanded at a solid 3.8 percent rate in the April-June quarter despite the fact that consumer spending slowed to a growth rate of just 1.4 percent, the weakest performance since the end of 2005.
Analysts said the September strength should push consumer spending up to a rate of around 3 percent in the current quarter although they forecast that the drags from the housing slump and the credit crunch have yet to be fully felt on the economy. They also cautioned that some of the strength seen in September reflected one-time events such as strong auto sales because of dealer incentives and heavy spending on electricity because of an August heat wave.