Americans are spending but inflation cast pall over economy

WASHINGTON (AP) — Americans are doing the main thing that drives the U.S. economy — spending — but accelerating inflation is casting a pall.

A raft of economic data issued Wednesday showed the economy on solid footing, with Americans’ incomes rising and jobless claims falling to a level not seen since the Beatles were still together.

The spike in prices for everything from gas to rent, however, will likely be the chief economic indicator Americans discuss over Thanksgiving Day dinner.

The Commerce Department reported that U.S. consumer spending rebounded by 1.3% in October. That was despite inflation that over the past year has accelerated faster than it has at any point in more than three decades.

The jump in consumer spending last month was double the 0.6% gain in September.

At the same time, consumer prices rose 5% compared with the same period last year, the fastest 12-month gain since the same stretch ending in November 1990.

“Although consumer confidence has declined in the fall because of high inflation, households continue to spend,” said Gus Faucher chief economist at PNC Financial.

Personal incomes, which provide the fuel for future spending increases, rose 0.5% in October after having fallen 1% in September, which reflected a drop in government support payments.

Pay for Americans has been on the rise with companies desperate for workers, and government stimulus checks earlier this year further padded their bank accounts. That bodes well for a strong holiday season and major U.S. retailers say they’re ready after some companies, like Walmart and Target, went to extreme lengths to make sure that their shelves are full despite widespread shortages.

Analysts said the solid increase in spending in October, the first month in the new quarter, was encouraging evidence that overall economic growth, which slowed to a modest annual rate of 2.1% in the July-September quarter, will post a sizable rebound in the current quarter. That is expected as long as the recent rise in COVID cases and concerns about inflation don't dampen holiday shopping.

“After experiencing one of the most severe economic shocks of the past century in 2020, the U.S. economy has displayed one of the most rapid recoveries in modern history in 2021,” Gregory Daco, chief U.S. economist for Oxford Economics, wrote in a note to clients. Daco predicts GDP in the current October-December period would rebound to a growth rate of 5.6%.

The number of Americans applying for unemployment benefits, meanwhile, dropped last week by 71,000 to 199,000, the lowest since mid-November 1969. But seasonal adjustments around the Thanksgiving holiday contributed significantly to the bigger-than-expected drop. Unadjusted, claims actually ticked up by more than 18,000 to nearly 259,000.

In a cautionary note Wednesday the University of Michigan reported that its consumer sentiment index fell 4.3 percentage points to a reading of 67.4 this month, its lowest level since November 2011, weighed down by inflation concerns.

And there are regions in the U.S. experiencing a surge in COVID-19 cases that could get worse as families travel the country for the Thanksgiving holiday.

President Joe Biden acted Tuesday to counter spiking gasoline prices by ordering a release from the nation's strategic petroleum reserve, but economists expect that move to have only a minimal effect on the surge in gas prices.

The Fed seeks to conduct its interest-rate policies to achieve annual gains in its preferred price index of around 2%. However, over the past two decades, inflation has perennially failed to reach the Fed's 2% inflation target.

Fed officials at their November meeting announced the start of a reduction in its $120 billion per month in bond purchases which the central bank had been making to put downward pressure on long-term interest rates in order to spur the economy.

Minutes from that meeting showed that Fed officials with growing concern that the unwanted price pressures could last for a longer time. Officials indicated that the Fed should be prepared to move to reduce bond purchases more quickly or even start raising the Fed’s benchmark interest rate sooner to make sure inflation does not get out of hand.

The reduction in bond purchases marked the Fed's first maneuver to pull back on the massive support it has been providing to the economy. Economists expect that will be followed in the second half of 2022 by an increase to the Fed's benchmark interest rate, which influences millions of consumer and business loans. That rate has been at a record low of 0% to 0.25% since the pandemic hit in the spring of 2020.