Inflation and Labor Are Cooling

U.S. consumer spending, inflation, and the labor market all cooled in recent weeks, adding to evidence that the economy is slowing.

Inflation-adjusted personal spending rose 0.2 percent last month after a downwardly revised 0.3 percent advance in September, according to the Bureau of Economic Analysis (BEA). Separate data Thursday showed recurring applications for unemployment benefits rose to the highest in about two years.

The figures are consistent with expectations that the economy will moderate in the fourth quarter following the strongest growth pace in nearly two years.

Cooler demand may also help reassure the Federal Reserve that inflationary pressures will continue to abate, reinforcing forecasts that central bankers are done raising interest rates.

“The Fed is on hold for now, but their pivot to rate cuts is getting closer: Inflation is clearly slowing, and the job market is softening faster than expected,” Bill Adams, chief economist at Comerica Bank, said in a note.

The core personal consumption expenditures (PCE) price index, which strips out the volatile food and energy components, rose 0.2 percent last month, according to the BEA. From a year ago, the Fed’s preferred gauge of underlying inflation advanced 3.5 percent.

The Fed’s latest Beige Book survey, released Wednesday, showed that economic activity slowed in recent weeks as households pulled back on discretionary spending. Labor demand also eased. Central bank officials are increasingly relying on this type of information to assess the path of the economy and inflation.

Labor Department data showed continuing claims for unemployment insurance rose to 1.93 million in the week ended November 18. The figure has been climbing since September, suggesting out-of-work Americans are finding it increasingly difficult to secure new employment.

What Bloomberg Economists Say…

“The persistent climb in continuing claims points to a risk that the unemployment rate will reach 4.0 percent in November. … While some of the surge was likely due to issues in seasonally adjusting the data, anecdotes suggest labor demand is easing.”

— Eliza Winger, economist

Meanwhile, the overall PCE price index was unchanged from the prior month, on lower energy prices. On an annual basis, it’s running at 3 percent—the smallest gain since March 2021, yet still above the Fed’s 2 percent target.

Policymakers pay close attention to services inflation excluding housing and energy, which advanced 0.1 percent from September, matching the smallest increase this year.

On an inflation-adjusted basis, outlays for goods rose 0.1 percent, restrained by a drop in spending on durable goods such as motor vehicles. Services spending increased 0.2 percent.

Real disposable income, the main support to consumer spending, increased 0.3 percent. That was the biggest gain since May and supported by interest and dividend payments. Wages and salaries, unadjusted for inflation, rose just 0.1 percent, the smallest advance this year. The saving rate edged up to 3.8 percent.

Meanwhile, a gauge of pending sales of previously owned homes fell in October to its lowest level on record, illustrating a resale market battered by high borrowing costs and prices. The National Association of Realtors’ index of contract signings to purchase previously owned homes declined 1.5 percent, to 71.4, the lowest in data back to 2001, the group reported Thursday.

Data published earlier this week showed the U.S. economy grew more than originally estimated in the third quarter. Forecasters surveyed by Bloomberg see economic growth slowing to a 1.2 percent annualized pace this quarter.

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