U.S. consumer spending rose in August, but inflation-adjusted spending was weaker than initially thought last month, boosting expectations that economic growth slowed in the third quarter as COVID-19 infections increased.
Friday’s Commerce Department report, which showed inflation remained warm in August, increased the risk that consumer spending would stop in the third quarter, even if spending accelerates further more in September. The adjustment to inflation or the so-called real consumer spending is what goes into the calculation of gross domestic product.
“Third-quarter consumer spending is only on track,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina. “If COVID cases continue to decline and sentiment turns positive, there will be room for a more solid end to this tumultuous year.”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.8% in August. July data was revised downward to show a 0.1% drop in spending instead of a 0.3% gain, as previously reported.
Consumption increased by a 1.2% increase in purchases of goods, which reflected the increase in spending on food and household supplies, as well as on recreational items, which offset the fall. of motor vehicle expenses. The global shortage of semiconductors is undermining car production.
Expenditure on goods fell 2.1% in July. Spending on services rose 0.6% in August, with support from housing, utilities and health care. Services, which account for most of consumer spending, rose 1.1% in July. Expenditure is again on services, but the resurgence of coronavirus cases, driven by the Delta variant, reduced demand for air travel, hotel accommodation and sales to restaurants and bars.
Economists surveyed by Reuters had forecast consumer spending to rise 0.6% in August.
Inflation maintained its upward trend in August, although price pressures have probably peaked. The personal consumption expenditure (PCE) price index, excluding volatile food and energy components, rose 0.3% after rising the same margin in July. In the twelve months to August, the so-called PCE core price index rose 3.6%, equaling the July gain.
The PCE base price index is the Federal Reserve’s preferred measure of inflation for its flexible 2% target. Last week, the U.S. central bank updated its core PCE inflation projection for 3.7% this year, from 3.0% in June.
The Fed said it would likely begin lowering monthly bond purchases as early as November and that interest rate hikes could follow faster than expected. Fed Chairman Jerome Powell, who has maintained that high inflation is transitory, told lawmakers Thursday he predicted some relief in the coming months.
However, inflation could remain high for some time. A survey by the Institute for Supply Management on Friday showed manufacturers experienced longer delays in delivering raw materials to factories and paid higher prices for tickets in September.
Stocks on Wall Street were higher. The dollar fell against a basket of currencies. US Treasury prices were mixed.
High inflation comes down to spending. Real consumer spending rose 0.4% in August after a 0.5% downward revision in July. With August and July data in hand, economists predicted that growth in consumer spending would likely slow down to around 1% annualized in the third quarter.
Consumer spending grew at a robust pace of 12.0% during the quarter from April to June, representing much of the growth rate of 6.7% in the economy. The level of GDP is now above its maximum in the fourth quarter of 2019.
The Atlanta Fed cut its GDP estimate for the quarter at a rate of 2.3% from a rate of 3.2%. The slower growth was bolstered by a third Commerce Department report showing flat spending in August.
“Even with a softening growth outlook, we continue to expect the Fed to announce the start of the downturn in the early November meeting,” Michael Feroli, chief economist at JPMorgan’s U.S., told New York.
The economy remains supported by record corporate profits. Households accumulated at least $ 2.5 trillion in excess savings during the pandemic. Coronavirus infections are declining, which is already leading to increased demand for travel and other high-contact services. Companies need to replenish depleted inventories, which will keep factories humming.
A fourth University of Michigan report showed consumer sentiment rose for the first time in three months in September. But a Conference Board poll this week showed consumer confidence fell to a seven-month low in September.
Although personal income only increased by 0.2% in August after increasing by 1.1% in July, as the increase in tax credit payments by the government was offset by the Decreased pandemic-related unemployment insurance controls, wages rise as companies compete for scarce workers. Wages rose 0.5% in August, which should help keep spending sustained.
With high inflation, real disposable disposable income fell 0.3% after rising 0.7% in July. The savings rate fell to a still high 9.4%, from 10.1% in July.
“Households still have a long way to go given the increase in employment and wages, which increase net worth and massive over-savings,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “However, rising prices are affecting purchasing power, which is exacerbating the lack of supply.”