US spending up on storm payouts

Hurricanes Katrina and Rita have belatedly boosted the economy

US consumers have been spending the insurance payments received after hurricanes swept the country, boosting spending in September by 0.5%.

Americans also enjoyed their biggest leap in income in 10 months, a Commerce Department report showed on Monday.

Personal income leapt 1.7%, the biggest rise since late 2004, with payments in the wake of hurricanes Katrina and Rita rising at a $120bn (£68bn) annual rate.

The gain came after a 0.9% incomes fall in August, precipitated by Katrina.

Energy prices

Hurricane Katrina hit in late August and Rita struck in late September, and retail and personal business income plunged on the back of uninsured property losses.

However, even though consumer spending rose, the increase was swallowed up by rising energy costs, and, adjusted for inflation, spending fell 0.4% after a 1% August drop.

That inflation has partly been caused by the hurricanes disabling oil and gas facilities in the Gulf of Mexico, driving energy prices higher and fanning fears of inflation.

To combat inflation, the Federal Reserve may well boost interest rates by another quarter-point on Tuesday, which would be the 12th increase of that size since June 2004.

The Fed will have noticed that the Commerce Department's inflation measure rocketed up 0.9%, the largest rise since February 1981.

'Little momentum'

Yet, taking away volatile food and energy prices, the so-called PCE price index advanced just 0.2%.

Consumers have been spending their hurricane windfalls on big-ticket durable goods, such as cars, which have also been discounted and promoted to attract buyers.

Experts believe consumer spending may cool in the last quarter of the year as car sales decline, not least due to rising petrol costs.

"The last month of the quarter [September] tells you a great deal about how much momentum there was in spending, and it doesn't look to me like there was that much," said David Resler, chief economist at Nomura Securities International in New York.