U.S. consumer spending continued its upward trend in September, pushing the economy toward a stronger growth path as it heads into the year’s final quarter. Data from the Commerce Department’s Bureau of Economic Analysis shows that consumer spending, which represents over two-thirds of U.S. economic activity, increased by 0.5% in September. The rise exceeded economists’ forecasts and underscored the enduring strength of consumer demand, a critical pillar of the American economy.
Consumer Spending Strengthens Growth Outlook
Consumer spending, which posted a 0.5% increase in September following an upwardly revised 0.3% gain in August, has propelled economic momentum into the fourth quarter. Economists polled by Reuters had expected a more modest 0.4% increase, yet the continued spending resilience indicates a strong growth trajectory. According to the Bureau of Economic Analysis, consumer spending surged at a 3.7% annualized rate in the third quarter, driving the economy’s overall 2.8% growth rate.
“Spending remains solid, thanks to a robust labor market and rising household wealth,” analysts noted, as higher stock values and home prices contributed to household finances. This uptick is largely fueled by middle- and upper-income households, which have greater spending flexibility.
PCE Inflation Offers Relief Amid Strong Spending
Another factor boosting consumer confidence is the subsiding inflation rate. The personal consumption expenditures (PCE) price index rose by only 0.2% in September, aligning with economists’ expectations and providing slight relief to households. The PCE price index’s year-on-year growth of 2.1% marks the lowest increase since early 2021, a slowdown that primarily benefits lower-income families more affected by inflationary pressures.
Core inflation, which excludes volatile food and energy prices, showed a monthly increase of 0.3% in September. Year-over-year, core inflation remained steady at 2.7% for the third month in a row, a level the Federal Reserve considers close to its 2% inflation target.
Federal Reserve Rate Cuts Expected to Continue
In response to slowing inflation, the Federal Reserve has initiated an interest rate-cutting cycle. The U.S. central bank implemented a larger-than-expected half-point cut last month, marking the first reduction since 2020, and brought the policy rate down to a 4.75%-5.00% range. Expectations are now building that the Fed will announce a further 25 basis point reduction next Thursday, an easing anticipated to provide more support for continued economic growth.
“The Fed’s actions are likely to lower borrowing costs for businesses and consumers, further driving the economic expansion we’ve seen in recent months,” noted economists. The central bank’s planned rate cuts follow a period of aggressive tightening in 2022 and 2023, with rates previously raised by a cumulative 525 basis points to counter inflation.
Income Gains and Household Wealth Underpin Spending Growth
September’s consumer spending data highlight a strong labor market and rising household net worth as key drivers. Gains in income and household wealth—spurred by stock market performance and increased home prices—have bolstered consumer spending. This has created a firm foundation for economic growth, although analysts caution that much of the spending power lies with middle- and upper-income families.
In addition to robust spending on goods and services, lower inflationary pressures are also supporting household budgets, allowing for higher discretionary spending.
With consumer spending maintaining its momentum, the U.S. economy is positioned for a solid close to 2023. As inflation nears the Federal Reserve’s target, upcoming interest rate cuts could further fuel economic activity by reducing borrowing costs. Although concerns remain about spending disparities across income levels, the strong labor market and rising household wealth provide a positive outlook for sustained growth in the coming months.
