WASHINGTON — Americans boosted spending by a healthy amount in August, offering welcome evidence that the economy is on solid footing heading into the final quarter of the year.
Consumer spending in August rose 0.5 percent from the previous month after showing no gain in July, the Commerce Department reported Monday. About half of the increase was driven by auto sales. It was the best result since spending also expanded 0.5 percent in June.
Helped by strength in wages and salaries, income rose a modest 0.3 percent in August, slightly faster than a 0.2 percent July increase.
The spending gain was another sign that the economy is maintaining strength in the current July-September quarter. Consumer spending accounts for about 70 percent of economic activity, and the slowdown in July had raised concerns about whether the economy would retain the momentum it showed in the spring after a harsh winter.
Paul Dales, senior U.S. economist at Capital Economics, said that consumer spending was the strongest in six months after the effects of inflation were removed.
“Overall, faster income growth, the recent rises in the saving rate and the latest loosening in credit conditions suggest that consumption growth will accelerate in the fourth quarter and next year,” Dales said.
The saving rate dipped slightly to 5.4 percent of after-tax income in August. That was down only slightly from a saving rate of 5.6 percent in July, which had been the highest monthly rate since December 2012.
Inflation was well contained in August, with an inflation measure tracked closely by the Federal Reserve showing no change after a 0.1 percent July increase. Over the past 12 months, this measure of inflation is up just 1.5 percent, well below the Fed's 2 percent target.
About half of the spending growth came from a big jump in car sales in August. That helped push durable goods purchases up 1.8 percent in August after no change in July. Sales of nondurable goods actually fell 0.3 percent in August, a decline that likely reflected falling gas prices. Spending on services including utilities and rent rose 0.5 percent in August.
The government on Friday reported that the overall economy as measured by the gross domestic product grew at a rapid 4.6 percent annual rate in the April-June quarter, a significant rebound after the economy had gone into reverse in the first quarter.
Many expect that the momentum created in the spring will keep activity rising at a solid pace for the rest of this year and into 2015. The latest outlook from top forecasters with the National Association for Business Economics predicts the economy will grow at a 3 percent rate in the second half of this year and will average 3 percent in 2015, which would give the country its strongest annual growth rate in a decade.
Since the recession ended five years ago, growth has averaged a lackluster 2 percent. The optimism for a breakout to higher growth stems on the belief that rising employment will generate growing incomes, which would then support more consumer spending. In addition, the significant drag from cutbacks in government spending and higher taxes are beginning to wane.
Responding to stronger job growth, consumer confidence rose in September to 84.6, the highest point in 14 months and the second highest level in the past seven years.
The Federal Reserve is continuing to pursue its ultra-low interest rate policies as a way to make sure that the forecasts for stronger growth are not suddenly derailed by rising borrowing costs. At its last meeting two weeks ago, it retained language that it expected to keep rates low for a “considerable time,” which was seen as a strong signal by many economists that its key short-term interest rate will remain at a record low near zero until next summer.
The Fed has been able to maintain low rates because inflation has remained well below the Fed's 2 percent target.