US Consumer Spending Remains Strong as Inflation Gradually Decreases – Reuters

By Lucia Mutikani

U.S. consumer spending saw a modest increase in August, falling slightly short of expectations. Nonetheless, this development did not significantly alter the outlook for solid economic growth in the third quarter. Additionally, the annual price rise recorded was the smallest in over three and a half years.

Data from the Commerce Department indicated that the goods trade deficit narrowed by the largest margin in nearly two years during the previous month. This slight reduction in the trade deficit suggests that while trade may pose a minor drag on gross domestic product (GDP), it could be offset by increases in inventories.

Analysts believe the data does not indicate a decline significant enough to prompt the Federal Reserve to implement a 50 basis point interest rate cut in November, as some investors had hoped. The elevated savings rate and ongoing strong wage growth are expected to provide a solid foundation for consumer spending in the coming months.

Next week’s employment report for September could provide more insights regarding potential future adjustments to borrowing costs.

“The resilience of consumer spending and the stronger foundations reinforce our belief that the near-term economic outlook remains positive,” stated Michael Pearce, deputy chief U.S. economist at Oxford Economics. He added that this trend should eventually lead to an uptick in hiring and maintain solid labor market conditions over the next year or two, which could dissuade the Fed from accelerating rate cuts in the upcoming year.

Consumer spending, which constitutes over two-thirds of U.S. economic activity, increased by 0.2% in August following an unrevised 0.5% gain in July. Economists had anticipated a 0.3% rise.

The increase in spending primarily occurred in services, which rose by 0.4% after a 0.3% increase in July, with notable spending on housing, utilities, financial services, and insurance. There were also upticks in healthcare, transportation, and recreation services, alongside increased expenditures at bars, restaurants, and lodging establishments. However, spending on goods dipped by 0.1%, influenced by declines in motor vehicle and parts purchases, as well as reduced receipts at gas stations tied to lower gasoline prices. Food and beverage sales also fell, reflecting a trend of consumers opting for cheaper store-brand items, which offset gains in other nondurable goods and recreational goods.

When adjusted for inflation, consumer spending grew by 0.1%, down from a 0.4% increase in July. Analysts estimate that real consumer spending is on pace for a 3.4% annualized rate in the current quarter, compared to a 2.8% growth rate in the second quarter.

Consumer spending remains bolstered by robust wage growth, even as the labor market experiences a slowdown. Recent revisions to national accounts data revealed stronger wage and salary growth in the second quarter than previously reported, alongside a higher-than-expected savings rate.

Income in August rose by 0.2%, despite declines in personal interest and dividend income. Wages and salaries increased by 0.5%, following a 0.3% rise in July. The savings rate decreased slightly to a still-healthy 4.8%, down from an upwardly revised 4.9% in July, which was initially reported at 2.9%.

The elevated savings rate suggests positive prospects for future consumer spending, allaying concerns that consumers might be depleting their savings to fund expenditures. Rising unemployment, which surpassed 4%, had raised fears about precautionary savings potentially undermining spending.

On Wall Street, stock prices were up, while the dollar declined against a range of currencies, and U.S. Treasury yields fell.

Regarding inflation, the personal consumption expenditures (PCE) price index rose by 0.1% in August, aligning with expectations, after an unrevised gain of 0.2% in July. Goods prices fell by 0.2%, countered by a 0.2% increase in service costs. Over a twelve-month period leading to August, the PCE price index increased by 2.2%, the smallest annual gain since February 2021, down from 2.5% in July.

Excluding volatile food and energy prices, the PCE price index increased by 0.1%, matching the prior month’s rise. Core inflation over the same twelve-month span advanced by 2.7%, compared to a 2.6% rise in July. The Federal Reserve closely monitors these PCE price measures in pursuit of its 2% inflation goal.

Financial markets have adjusted expectations for a half-percentage-point rate cut at the Fed’s upcoming policy meeting to about 52%, while the likelihood of a 25 basis point rate reduction fell to approximately 48%.

Last week, the Fed lowered its benchmark overnight interest rate by 50 basis points to a range of 4.75% to 5.00%—the first reduction in borrowing costs since 2020, following substantial rate increases totaling 525 basis points in 2022 and 2023.

In a separate report, the Commerce Department’s Census Bureau noted that the goods trade deficit shrank by $8.6 billion, or 8.3%, in August, bringing it to $94.3 billion. This decrease marked the largest drop since November 2022, attributed to a 1.6% decline in imports, predominantly in industrial supplies and motor vehicles. Meanwhile, goods exports rose by 2.4%, propelled by consumer goods and vehicles, with wholesale inventories increasing by 0.2% and retail stocks up by 0.5%. These inventory gains are expected to mitigate the anticipated minimal negative impact on GDP from trade.

The Atlanta Fed has revised its third-quarter GDP growth estimate to a 3.1% rate, largely influenced by the trade data. The economy had grown at a rate of 3.0% in the previous quarter.

“Today’s data confirm moderate inflation and solid third-quarter GDP,” remarked Abiel Reinhart, an economist at a major financial institution.