U.S. Consumer Spending Slows in September

Consumer Spending Trends

September saw a deceleration in consumer spending growth, which rose by 0.3%, down from a revised 0.5% increase in August, according to the U.S. Commerce Department. This slowdown reflects underlying challenges such as a weakened labor market, rising costs of living, and reductions in government support programs like Medicaid and food assistance. Economists highlight that higher-income households, buoyed by stock market gains, helped sustain spending earlier in the year, but middle- and lower-income groups are increasingly strained. Tariffs on imported goods have further pressured household budgets, contributing to a bifurcated or "K-shaped" economic recovery. Analysts suggest these factors could continue to weigh on consumer spending in the coming months.

Economic Growth and Inflation

Despite the moderation in consumer spending, the U.S. economy demonstrated resilience in Q3. The Atlanta Federal Reserve estimated GDP growth at an annualized rate of 3.8%, consistent with Q2’s pace. Inflation data, however, presents a mixed picture. The Personal Consumption Expenditures (PCE) Price Index, a key inflation metric, rose 2.8% year-over-year in September, up from 2.7% in August. Excluding volatile food and energy prices, core inflation edged slightly lower to 2.8% from 2.9% in the prior month. The persistent inflationary pressures, coupled with robust GDP growth, underscore the challenges policymakers face in navigating economic recovery amidst rising costs.

Impact on Federal Reserve Policy

The Federal Reserve's upcoming December meeting will likely hinge on the latest inflation and labor market data. While the PCE inflation index remains above the Fed’s 2% target, the slight decline in core inflation could support a case for a widely anticipated interest rate cut. Analysts note that the Fed is balancing its dual mandate of controlling inflation while addressing signs of economic slowdown, including stagnating hiring and a potential uptick in unemployment. Additionally, elevated services inflation—unrelated to tariff effects—may continue to influence the central bank’s monetary policy decisions. Markets are currently pricing in a 25-basis-point rate reduction as the Fed aims to bolster economic growth.