Consumer spending rose solidly in September, putting the economy on a firmer footing heading into the fourth quarter even though households had to pull back on saving to fund purchases.
The Commerce Department said on Monday that consumer spending rose 0.8 percent, the largest increase since February, after an unrevised 0.5 percent gain in August.
Spending accounts for about 70 percent of U.S. economic activity and last month's increase offered a strong hand off from the July-September period to the current quarter.
"The jumping off point, or the base point, is already pretty high. You have a lot of momentum going into the fourth quarter," said Ellen Zentner, a senior U.S. economist at Nomura Securities in New York.
The rise beat economist's expectations for a 0.6 percent increase last month. When adjusted for inflation, consumer spending rose 0.4 percent after edging up 0.1 percent in August.
Bond and currency markets showed little reaction, while the U.S. stock market was closed as New York braced for a hit from Hurricane Sandy.
The spending figures were incorporated into last Friday's report on third-quarter gross domestic product. Consumer spending increased at a 2 percent annual pace during the quarter after rising at a 1.5 percent rate in the prior period.
That helped to lift economic growth at a 2 percent pace, an acceleration from the second quarters' 1.3 percent advance.
The spurt in spending as the quarter ended, which was concentrated in long-lasting goods such as autos and Apple Inc's iPhone 5, provides momentum that should help support growth in the fourth quarter. Some analysts, however, warned that spending could weaken near year-end if consumers start to worry about the potential for higher taxes at the start of the year.
The United States faces a so-called fiscal cliff of higher taxes and lower government spending that could suck $600 billion out of the economy next year unless lawmakers act.
INCOMES LAGGING
Tepid income growth as the labor market struggles to gain speed also threatens to undermine spending, which is an even more important pillar for growth than usual given signs that businesses are cutting back on investment.
While personal income last month grew 0.4 percent, the most since March and a step-up from August's 0.1 percent gain, the amount of money at the disposal of households after inflation and taxes was flat.
That meant households had to cut back on saving to fund purchases. The saving rate slipped to 3.3 percent last month, the lowest since November 2011, from 3.7 percent in August.
"We have only seen two lower readings on the savings rate in the recovery, which suggests that the consumer has virtually no cushion to absorb the scheduled tax hikes at the beginning of 2013," said John Ryding, chief economist at RDQ Economics in New York.
Spending last month rose even as households paid 13 cents per gallon more for gasoline. Spending on durable goods rose solidly, while outlays for services rebounded 0.2 percent after declining by the same margin in August.
The rise in gasoline prices kept inflation pressures somewhat elevated. A price gauge in the report increased 0.4 percent for the second month in a row, taking its gain over the past 12 months up to 1.7 percent from 1.5 percent in August.
But a core measure that strips out food and energy costs edged up 0.1 percent for a third straight month, suggesting the rise in overall inflation will be short-lived.
In the 12 months to September, the core index was up 1.7 percent after rising 1.6 percent in August.
The Federal Reserve has a 2 percent inflation target and the moderate rise in core inflation should offer comfort to the central bank, which has been buying $40 billion in mortgage-backed debt each month in an effort to push borrowing costs lower and spur faster job growth.
