Consumers Keep Spending While Inflation Eases

U.S. consumers spent more freely in August, soothing immediate concerns that the housing bust would stall the economy, and inflation eased, helping clear the way for lower interest rates, according to data released on Friday.

Paul Sakuma / AP

Other reports on construction spending, consumers and
business activity indicated that last month's credit market
turmoil had dented near-term confidence, but reassured those economists who feared a rapid deterioration in the economy.

Countering those slowdown fears, consumers boosted their spending at the strongest rate in four months in August thanks to spending on big ticket items such as refrigerators, the
Commerce Department reported. Car makers offered substantial incentives last month to help move inventory.

"The increase in personal spending in August shows that despite the cooling of the labor market over the summer consumers are still spending," said Gary Thayer, chief economist at A.G. Edwards in St. Louis, Missouri.

In the same report, core consumer prices, which exclude volatile energy and food prices, posted their smallest year-on-year rise in 3-1/2 years.

A 1.8 percent year-over-year increase in the core PCE price index, which is the Federal Reserve's favored inflation gauge, brought the reading within the Fed's presumed comfort zone of between 1 and 2 percent.

"The slow-growing economy is keeping inflation in check and leaves the door open for the Fed to cut interest rates later this year to support the housing sector," Thayer said.

Expectations that the U.S. central bank will continue cutting interest rates sent the dollar sharply lower on Friday. Lower rates undermine the appeal of the dollar to foreign investors and the greenback fell to a record low with the euro climbing above $1.42 after the data was released.

Concerns about the weaker dollar helped push stocks lower, although the inflation reading helped boost bonds.

The Fed cut official interest rates by a half percentage point last week, and many analysts think it will have to reduce them further in order to cushion an expected slowdown stemming
from U.S. mortgage market problems that threaten to brake the broader economy.

For the moment, U.S consumers, who account for two thirds of U.S. economic activity, appear little fazed.

In addition to the report on consumer spending, consumer sentiment was unchanged in late September from August, although respondents in the survey said current conditions had
deteriorated, according to the Reuters/University of Michigan Surveys of Consumers.

A reading of Midwest business activity for September from the National Association of Purchasing Management-Chicago rose at a slightly faster pace than expected, to 54.2 from 53.8 in August. The jobs component of that index slipped.

"Overall the report is balanced and a bit optimistic," said Tom Sowanick, chief investment officer with Clearbrook Financial LLC, in Princeton, New Jersey. "It suggests that manufacturing is stable," he said.

U.S. construction spending rose 0.2 percent in August, surprising economists who on average expected spending to decline.

However, stress in credit markets may increasingly be taking a toll on the real economy, another report hinted. Business activity in New York City weakened in September to its
lowest level in almost a year as a credit crunch late in the summer hurt the city's core financial sector, according to an industry report.

The National Association of Purchasing Management-New York's index of local business activity fell to 437.6 in September from 445.0 in August, marking the lowest level since October 2006.

"A slowing in the city's core financial businesses, amid the credit crunch that began late this summer, likely is taking a toll," the report said.

The report's measure of current business conditions dropped to its lowest level since November 2001 when the city was recovering from the September 11 attacks.