U.S. consumer spending gauge rises, but confidence weakens

WASHINGTON Tue Oct 29, 2013 1:20pm EDT

A customer shops along the fruits department in a Sam's Club store, a division of Wal-Mart Stores, in Bentonville, Arkansas June 2, 2011. REUTERS/Sarah Conard

A customer shops along the fruits department in a Sam's Club store, a division of Wal-Mart Stores, in Bentonville, Arkansas June 2, 2011.

Credit: Reuters/Sarah Conard

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WASHINGTON (Reuters) - A gauge of U.S. consumer spending rose in September as Americans likely snapped up Apple's new iPhone and bought leisure goods, but falling car sales pointed to sluggish economic growth.

And even the signs of strength could be short-lived as other data on Tuesday showed consumer confidence tumbled in October as a partial government shutdown rattled households.

With lawmakers still to agree on a budget, economists fear another damaging fight might be in the cards early next year.

"Uncertainty created by the political shenanigans in Washington earlier this month may have shaken consumer confidence sufficiently to cause consumers to be slightly less encouraged to spend during the crucial holiday season," said Millan Mulraine, senior economist at TD Securities in New York.

Excluding automobiles, gasoline and building materials, retail sales increased 0.5 percent last month after a 0.2 percent gain in August, the Commerce Department said.

This so-called core sales gauge corresponds most closely with the consumer spending component of gross domestic product. Economists polled by Reuters had expected core retail sales to increase 0.4 percent in September.

Spending has been supported by rising home and share prices, and low gasoline prices. But even against that positive backdrop, weak consumer morale could crimp future sales growth.

In a separate report, the Conference Board, an industry group, said its index of consumer sentiment dropped to a six-month low of 71.2 in October from 80.2 in September.

The survey also showed a deterioration in households' perceptions of the labor market in October, which suggests hiring may have slowed.

"Concerns about jobs do lead to slower spending. Thus, the outlook for consumption this quarter is not for anything great," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Lackluster demand is keeping inflation tame. In a third report, the Labor Department said its producer price index dipped 0.1 percent last month as a drop in wholesale food prices offset a rise in the cost of energy.

It was the first decline since April and followed a 0.3 percent rise in August.

Economists had forecast prices received by the nation's farms, factories and refineries rising 0.2 percent in September.

In the 12 months through September, wholesale prices rose 0.3 percent, the weakest reading since October 2009.

The data, which comes on the heels of weak reports on hiring, home sales and manufacturing, should provide the Federal Reserve with ammunition to maintain monthly bond purchases for a while as it tries to nurse the economy back to health.

Officials from the central bank opened a two-day meeting on Thursday to assess the economy. They are expected to keep their monthly $85 billion bond purchasing program in place until next March, according to a Reuters poll.

"Inflation is taking a very, very long nap. Almost nothing is causing significant upward pressure on prices," said Michael Montgomery, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

But there is at least one pocket of pricing power.

The S&P/Case Shiller composite index of home prices in 20 metropolitan areas rose 0.9 percent on a seasonally adjusted basis, beating economists' expectation for a 0.6 percent gain.

Compared to a year ago, prices rose 12.8 percent, the strongest increase since February 2006.

APPLE LIKELY LIFTED SALES

Prices for U.S. Treasury debt dipped on the retail sales and house price data. Stocks on Wall Street rose modestly, with the Standard & Poor's 500 index touching another record high. The dollar rose against a basket of currencies.

Core retail sales last month were boosted by a 0.7 percent advance in receipts at electronics and appliance stores.

The increase last month probably reflected sales of Apple's new iPhone. Those sales likely boosted receipts at non-store retailers, mostly Internet sites, which increased 0.4 percent. Apple said it sold 33.8 million iPhones in the September quarter.

While Americans bought smart phones, they cut back on automobile purchases, with sales at auto dealers falling 2.2 percent, the biggest drop since October last year.

That pushed down overall retail sales, which fell 0.1 percent in September. It was the first decline since March.

Households also bought furniture, sporting goods and some building materials and garden equipment. Clothing sales recorded their biggest drop since April 2012.

While core retail sales implied some strength in consumer spending, that probably will not alter views that economic growth slowed in the third quarter.

"The bump in core retail sales is not enough to salvage a weak quarter," said Michael Feroli, an economist at JPMorgan in New York.

(Reporting by Lucia Mutikani, additional reporting by Steven C Johnson and Luciana Lopez in New York; Editing by Krista Hughes and Chizu Nomiyama)

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