WASHINGTON (Nov 30): US consumer spending rose moderately in October, while the annual increase in inflation was the smallest in more than 2½ years, signs of cooling demand that bolstered expectations the Federal Reserve's (Fed) interest rate hiking campaign was over.

Those hopes were reinforced by other data on Thursday showing the labour market gradually easing. More Americans applied for unemployment benefits last week and the number on jobless rolls surged to a two-year high in mid-November.

Though the rise in the so-called continuing claims was consistent with anecdotal evidence of slowing demand for labour, it also reflected challenges adjusting the data for seasonal fluctuations following an unprecedented surge in filings for unemployment benefits early in the Covid-19 pandemic.

"The data this morning provide more ammunition for [Fed chair Jerome] Powell and others at the Fed who are looking at an extended hold for policy, rather than an additional rate hike to curb inflation pressures," said Conrad DeQuadros, a senior economic advisor at Brean Capital in New York. "There is a hint that searches for a new job by recently laid-off individuals may be taking longer."

Consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.2% last month after an unrevised 0.7% gain in September, the Commerce Department's Bureau of Economic Analysis said. The increase was in line with economists' expectations.

A 0.4% rise in outlays on services, including healthcare, housing and utilities as well as international travel, was partially offset by a 0.2% drop in spending on goods like new light trucks, probably the result of shortages caused by the recently ended United Auto Workers strike.

The moderation in consumer spending followed a brisk growth pace in the third quarter and reflects the impact of higher borrowing costs and depleted excess savings among low-income households. Though wages remain elevated, the pace of increase has slowed from earlier in the year as labour market momentum ebbs. Personal income rose 0.2% last month after climbing 0.4% in September. Wages edged up 0.1% after rising 0.5% in September. Slower wage growth is seen combining with the resumption last month of student loan repayments for millions of Americans to crimp spending next year.

Fears that the economy could slide into recession in early 2024 could see households reluctant to spend and instead build their savings. The saving rate rose to 3.8% from 3.7% in September. So far, the economy has defied predictions of a recession, growing at a robust 5.2% annualized pace in the third quarter, the fastest in nearly two years.

Inflation-adjusted consumer spending rose 0.2% last month. Economists expect spending this quarter to slow to around a 2% pace. Most believe the economy will settle into a period of very slow growth, and avoid an outright recession. The Atlanta Fed lowered its fourth-quarter GDP growth estimate to a 1.8% rate from a 2.1% pace earlier.

Stocks on Wall Street rose, with the Dow Jones industrial index touching its highest level this year. The dollar gained versus a basket of currencies. US Treasury prices fell.

Inflation cooling

Inflation as measured by the personal consumption expenditures (PCE) price index was unchanged in October after rising 0.4% in September. Food prices climbed 0.2% and the cost of energy products fell 2.6%.

In the 12 months through October, the PCE price index increased 3.0%. That was the smallest year-on-year gain since March 2021 and followed a 3.4% advance in September.

Excluding the volatile food and energy components, the PCE price index gained 0.2% last month. The so-called core PCE price index rose 0.3% in September. Monthly inflation readings of 0.2% on a sustainable basis are needed to bring inflation back to the US central bank's 2% target, according to economists.

The core PCE price index advanced 3.5% on a year-on-year basis in October, the smallest rise since April 2021, after increasing 3.7% in September.

The so-called super core, which is PCE services excluding energy and housing, rose 0.1% after increasing 0.4% in the prior month. The super core was up 3.9% year-on-year in October, slowing from a 4.3% increase in September.

The Fed tracks the PCE price indices for monetary policy. Policymakers are watching the super core PCE price index to try and gauge their progress in combating inflation.

Subsiding demand and inflation have raised optimism that the Fed is probably done raising rates this cycle, with financial markets even anticipating a rate cut in mid-2024.

Policymakers on Thursday suggested that rate hikes were likely over, but pushed back on market expectations that there will be a quick pivot to rate cuts. Since March 2022, the Fed has raised its benchmark overnight interest rate by 525 basis points to the current 5.25%-5.50% range.

A separate report from the Labor Department showed initial claims for state unemployment benefits increased 7,000 to a seasonally adjusted 218,000 for the week ended Nov. 25.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 86,000 to 1.927 million during the week ending Nov 18, the highest since November 2021, the claims report showed. Some economists were skeptical of the jump in continuing claims noting difficulties stripping out seasonal fluctuations from the data.

Goldman Sachs estimated that seasonal distortions accounted for the 269,000 increase in continuing claims since early September, and expected them to raise the level by an additional 125,000 by next March.

"We should keep in mind, however, that the seasonal adjustment process for the continuing claims data looks unusual relative to past comparable years so the recent upward trend in filings may not be a reliable reflection of underlying conditions in the labour market," said Daniel Silver, an economist at JPMorgan in New York. 

Still, the labour market is cooling in tandem with overall demand in the economy. The Fed's Beige Book report on Wednesday described demand for labour as having "continued to ease" in the several weeks to mid-November, with most districts reporting "flat to modest increases in overall employment".

  - Reuters