US consumer spending rebounded, but high inflation slowed demand

  • Consumer spending rose 0.4% in August
  • Personal income rose 0.3%; The savings rate is fixed at 3.5%
  • Core PCE price index jumps 0.6%; 4.9% year-over-year increase

WASHINGTON (Reuters) – U.S. consumer spending increased more-than-expected in August, but stubbornly high inflation is dampening demand, which could limit an expected rebound in economic growth this quarter.

The report from the Commerce Department on Friday also showed underlying inflation pressures increasing in the past month, providing cover for the Federal Reserve to stay on the path of its aggressive monetary tightening.

Wage growth also appears to be slowing and consumers are using excess savings to offset higher prices. This, combined with aggressive interest rate increases by the Federal Reserve, has increased the economy’s vulnerability to a recession in the coming year.

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“More pain awaits us as the economy heads for a moderate slowdown in the first half of next year,” said Sal Gutierre, chief economist at BMO Capital Markets in Toronto. “This will eventually cool inflation, but not before the Fed does some additional swings in the tightening can.”

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4% last month after declining 0.2% in July. Economists polled by Reuters had expected consumer spending to rise 0.2 percent.

Revisions to data from 2017 showed that consumer spending was slightly stronger than previously thought and the level of savings was lower. Some of the increase in spending last month reflected higher prices, especially for housing and utilities.

Spending led the services sector, with expenditures jumping 0.8% after rising 0.1% in July. There were also increases in spending on transportation, health care, dining out, and hotels and motels.

personal consumption

But spending on recreational services fell, a sign that consumers were cutting discretionary spending.

Spending on goods fell 0.5%, weighed down by lower receipts at petrol service stations amid lower gasoline prices. Spending on goods fell 0.7% in July. There was also a drop in spending on luxury goods, another indication that consumers are pulling back from discretionary spending. Expenditures on furniture and other long-term manufactured goods have decreased.

But spending on cars rose. Generally, expenditure is alternately due to services from goods.

Gasoline prices fell 11.8% to $3,691 a gallon in August compared to July, according to US Energy Information Administration data. However, that didn’t offer much relief on the inflation front last month, as prices for services rose 0.6%.

The Personal Consumption Expenditure (PCE) price index rose 0.3% after declining 0.1% in July. In the 12 months through August, the PCE price index rose 6.2% after advancing 6.4% in July. Excluding the volatile food and energy components, the PCE price index jumped 0.6% after remaining unchanged in July. The so-called core PCE price index rose 4.9% year over year in August after increasing 4.7% in July.

The Fed tracks personal consumption expenditures price indices for a 2% inflation target. Other inflation measures are going much higher. The CPI rose 8.3% year over year in August.

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. US Treasury yields fell.

inflation

Slowing wage growth

However, inflation is likely to have peaked. A separate report on Friday showed that one-year consumer inflation expectations in a University of Michigan survey fell to 4.7% in September. It was the lowest since September 2021 and down from 4.8% in August. The survey’s five-year inflation forecast fell to 2.7% from 2.9% in August, falling below the 2.9%-3.1% range for the first time since July 2021.

The Fed last week raised its policy rate by 75 basis points, its third consecutive increase of that size, and signaled more big increases to come this year.

Since March, the US central bank has raised the interest rate from near zero to the current range from 3.00% to 3.25%. Last week, the Fed raised its average forecast for core PCE inflation to 4.5% this year from its previous estimate of 4.3% in June. Its estimate of core inflation in 2023 was boosted to 3.1% from a previously expected 2.7% in June.

High inflation limits spending. Inflation-adjusted consumer spending rose 0.1% in August after declining 0.1% the previous month. This suggests that consumer spending may be tepid this quarter after helping to ease the burden on GDP from the slowdown in inventory buildup in the second quarter.

Consumer spending increased at a 2% year-over-year rate in the second quarter. The economy contracted at a pace of 0.6% in the last quarter after contracting at a rate of 1.6% in the January-March quarter. Goldman Sachs cut its third-quarter GDP growth forecast by 0.5 percentage point to 0.9% on spending data.

Growth in this quarter is seen largely driven by the shrinking trade deficit. It was also noted that the build-up of inventory, part of which is unsold goods due to slowing demand, is supporting GDP growth this quarter.

“The near-term outlook remains modest at best,” said Scott Hoyt, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “Higher interest rates will make new borrowing more expensive, and undermine spending on expensive goods normally bought on credit.”

Consumer spending is likely to remain moderate, with signs of a slowdown in wage growth showing. Personal income rose 0.3% in August, matching the previous month’s gain.

Wages rose 0.3 percent after rising 0.8 percent in July. The savings rate was unchanged at 3.5%. The savings rate in July fell to 3.5% from the previously announced 5.0%. The savings rate was 26.3% in March 2021. It is now close to the levels seen during the 2007-2009 Great Recession.

“Consumers seem to have been eating the ‘excess savings’ that accumulated during the early stages of the pandemic to fuel recent spending,” said Daniel Silver, an economist at JPMorgan in New York.

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(Reporting by Lucia Mutikani) Editing by Chizu Nomiyama and Andrea Ricci

Our criteria: Thomson Reuters Trust Principles.

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