Cars slow US consumer spending, monthly inflation slows
- Consumer spending rose 0.3% in July; June revised
- Personal income increases by 1.1%; Savings rate increases to 9.6%
- Core Price Index PCE rises 0.3%; 3.6% more than in the previous year
- Goods trade deficit decreases by 6.2%; Inventories are increasing
WASHINGTON, Aug. 27 (Reuters) – U.S. consumer spending slowed in July as a decline in car purchases due to congestion offset an increase in service spending, supporting the belief that economic growth may be faced in the third quarter a COVID-19 resurgence will mitigate infections.
But the foundation for the recovery remains solid as Friday’s Department of Commerce report shows wages are rising and Americans continue to grow their savings. Inflation appears to have peaked, which could sustain household purchasing power. Companies are also stocking up and exporting more goods, suggesting a slowdown in growth this quarter may be temporary.
“There are clear downside risks to spending as more events and trips are canceled and more products hit store shelves late,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto. “But it’s still a bit early to toss the economic outlook amid supportive wage and savings trends and a likely nudge from business investment, inventory and trade in the third quarter.”
Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.3% last month after rising 1.1% in June. Last month’s increase was in line with economists’ expectations.
Demand is turning back to services such as travel and leisure, but spending was insufficient to offset the decline in goods purchases, which are also affected by shortages.
Goods spend fell 1.1% last month, led by automobiles. A global shortage of semiconductors is hindering auto production. Spending on leisure items, clothing and shoes also declined. Still, goods spend is 20% above its pre-pandemic level.
Spending on services increased 1.0%, a broad increase, led by catering and accommodation. Spending on services last month was 1% above its February 2020 level. Healthcare, transportation and recreation have yet to make up for their pandemic losses.
Credit card data suggests spending on services like airfare and cruises, as well as hotels and motels slowed down in August amid rising COVID-19 cases fueled by the Delta variant.
Fear of the virus drove consumer sentiment to a more than 9-1 / 2-year low in August.
Inflation continued to rise over the past month, fueled by ongoing supply restrictions and the normalization of the economy following the upheavals caused by the pandemic. But the pace of the increase is slowing down.
The consumer spending index (PCE) excluding the volatile components of food and energy rose 0.3% in July. This was the smallest increase in five months, following a 0.5% increase in June. In the 12 months to July, the so-called core PCE price index rose 3.6% after a similar increase in June. The PCE core price index is the Federal Reserve’s preferred measure of inflation for its flexible 2% target.
Fed Chairman Jerome Powell defended his long-held view that high inflation would be temporary in a speech to the Jackson Hole economic conference on Friday. Powell said the economy continued to make headway towards the Fed’s benchmarks for reducing its massive support, but had not signaled the time for policy change. Continue reading
Powell’s comments boosted US stocks, with the S&P 500 (.SPX) and Nasdaq (.IXIC) making record highs.
The dollar fell against a basket of currencies. US Treasury bond prices rose.
INCREASE INCOME, SAVE
The high inflation slowed consumer spending last month. Adjusted for inflation, consumer spending decreased by 0.1%. So-called real consumer spending rose by 0.5% in June. Real consumer spending is slightly above the average for the second quarter.
“Current quarter spending growth is guaranteed to be well below the 11.6% annualized rate of the first half of the year, but at least it starts in positive territory,” said Lou Crandall, chief economist at Wrightson ICAP in Jersey City.
The Atlanta Fed cut its GDP growth estimate for the third quarter from 5.7% to 5.1%. The global resurgence of COVID-19 cases could lead to further disruptions in supply.
The economy grew by 6.6% in the second quarter, pushing the gross domestic product above its high in the fourth quarter of 2019.
But the burden of the slowdown in consumer spending this quarter is likely to be limited by a shrinking trade deficit and corporate replenishment of depleted inventories.
In another report on Friday, the Commerce Department said the goods trade deficit fell 6.2% to $ 86.4 billion last month as imports fell and exports rose.
Retail inventories increased 0.4% while wholesalers increased 0.6%.
Overall, the economy continues to be supported by record corporate profits. Households amassed at least $ 2.5 trillion in excess savings during the pandemic. An upturn in growth is expected in the fourth quarter, driven in part by the build-up of inventories.
The savings rate rose from 8.8% in June to 9.6% last month, as part of the money paid out by the government to qualified households under the child tax credit program was pledged. Personal income rose 1.1% after rising 0.2% in June.
Wages also rose in the competition for scarce labor, rising 1.0% in July. Household income after taking inflation into account rebounded by 0.7% after three consecutive monthly decreases.
Household wealth is also increased by high stock market prices and accelerating home prices.
“The overall position of the household sector is strong and consumers have a lot of purchasing power,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci
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