Despite a weaker labour market and less consumer buying power, strong consumer spending continues to drive the U.S. economy, says Standard & Poor’s Ratings Service in a report published today.

The S&P report explains that accommodative fiscal and monetary policies — such as low interest rates and federal tax cuts — have helped drive consumer spending. “But as oil prices continue to hover around record levels, earnings might not be able to keep up with inflation, and rising interest rates could slow future spending,” it says.

“The current low saving rate could suggest that consumers are already spending all of their money,” said Standard & Poor’s Economist Beth Ann Bovino, in a release. “Interest rates are rising, which should reduce the urge to borrow, and one would think higher gasoline prices would convince people to put off other purchases. We expect consumer spending to trend down to 3.1% in 2005, a slowdown, but not a decline.”

S&P says that a 0.2% rise in consumer prices meant that real weekly earnings were unchanged in September, as weekly hours were flat and hourly earnings rose 0.2%. Tax cuts aside, real weekly earnings are up 2.3% from a year ago, which implies a 0.1% drop in purchasing power for the average employee, it notes.