US August consumer spending and income fell, partly due to Hurricane Katrina, and inflation edged up amid record oil prices, bolstering expectations the Federal Reserve will keep raising interest rates.
US manufacturers outside areas affected by Katrina - like in the Midwest and New York - reported improvements in September on higher demand, based on a pair of regional factory surveys.
On the consumer front, spending fell an unexpectedly steep 0.5% in August, the biggest drop since November 2001, the Commerce Department in a report today that also showed a surprise decline in income potentially caused by Katrina.
The fall in spending came as energy prices pushed consumer inflation up 0.5%, the largest jump since September 1990, the Commerce Department said. Outside volatile food and energy costs, inflation as measured by the Fed's favorite gauge edged up 0.2%.
Over the past year, core inflation has climbed 2%, a tick faster than in the 12 months through July. Wall Street economists had expected personal income to rise 0.3% and had forecast a smaller drop of 0.3% in spending. In addition, they had expected core inflation to edge up only 0.1%.
Meanwhile, the Chicago purchasing managers index rose sharply to 60.5 in September after August's 49.2, its lowest reading since April 2003. This meant the Midwest's factory sector moved back to expansion mode after a temporary contraction in August. Economists on average had forecast the Chicago PMI index edging up to 51.
Analysts said that Katrina, ironically, may have had a positive effect on this index because of the big surge in orders. They said that massive government expenditures for the rebuilding of regions affected by Hurricanes Katrina and Rita will likely boost manufacturing in the coming months.
The National Association of Purchasing Management-New York said its business conditions index rose for a third consecutive month to 349.7 in September, its highest level in at least eight years. Data showing higher US inflation and slower consumer spending hurt both stocks and bonds, while a rebound in regional factory activity boosted the dollar.
Based on US interest-rate futures, the market has fully priced in a quarter percentage point rate hike by the Fed at its November policy meeting, which would push the key fed funds rate to 4%.
The latest data also boosted the market's expectations of another quarter point rate rise in December. Last week, the Fed raised the fed funds rate a quarter point for the 11th time since June 2004 to 3.75%.
Katrina, likely the costliest US storm ever, hammered US consumer confidence - a proxy on future retail spending - to their lowest level in 13 years, according to one survey.
The University of Michigan's consumer confidence index finished September at 76.9, unchanged from the initial reading in early September. Economists had predicted the consumer index to end at 78.00 against August's final reading of 89.10.
The Commerce Department said income in August decreased 0.1% as rental and proprietors' income fell. Hurricane Katrina, which slammed into the US Gulf Coast on August 29, likely shaved those two measures by a combined $100 billion annualized due to uninsured property losses, it said. But the hit to income was offset to the tune of $70 billion as insurance benefit payments rose in the storm's wake.
The Fed said the hit to economic growth from Katrina was likely to be temporary and that higher energy prices could add to inflation pressures.Although spending proved weaker than expected in August as auto purchases plummeted, the decline followed two months in which consumers spent freely and economists said the fall was not particularly troubling.
The spending decline pushed up the saving rate, the percentage of disposable income saved, to negative 0.7% from July's record low of minus 1.1%. A negative saving rate shows US consumers eating into their accumulated wealth to spend.
