In yet another positive economic sign, consumer spending rose sharply in September. Spending rose 0.8%, the highest increase since February. This follows an increase of 0.5% in August. Economists had predicted an increase of 0.6%. Consumer spending is vital to our economy, accounting for roughly 70% of all economic activity. This data helps explain the largest than expected GDP growth in the third quarter.
The extra spending came at a cost, as savings dipped in September. Consumers opted to spend instead of save, buying big ticket items like automobiles. With the Christmas holidays approaching, that is likely to be the case for the next few months. Whether or not US consumers can keep up that pace into next year is unknown.
Consumer spending has been a major problem. The financial crisis brought on a credit crunch, where consumers had a hard time borrowing money. The little economic growth we experience in the last decade was built on credit as middle income wages were flat. Buying things like cars and houses takes credit, as a vast majority of the population does not have the income to buy these items outright. As banks were deleveraging, they became much more strict with who they would lend money to.
All of the economic data released lately points towards a growing economy that is shaking off the last remnants of the previous recession. Job growth has been slow, but steady. The housing market is finally turning around. Consumer confidence is also rising. Barring a major negative event, 2013 should be a good year economically.