U.S. consumer spending slowed in July as a decline in motor-vehicle purchases owing to shortages offset a rise in outlays on services, supporting views that economic growth will moderate in the third quarter amid a resurgence in COVID-19 infections.
But the foundation for the recovery remains solid, with the report from the Commerce Department on Friday showing wages rising and Americans further boosting savings. Inflation appears to have peaked, which could preserve households’ purchasing power. Businesses are also restocking and exporting more goods, suggesting a slowdown in growth this quarter could be temporary.
“There are clear downside risks to spending if more events and trips are cancelled and more products are delayed getting to shelves,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “But it’s a bit early to throw in the towel on the economic outlook given supportive wage and saving trends and a likely boost from business investment, inventories and trade in the third quarter.”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.3 per cent last month after advancing 1.1 per cent in June. Last month’s rise was in line with economists’ expectations.
Demand is rotating back to services such as travel and leisure, but spending has been insufficient to compensate for the drop in goods purchases, which are also being impacted by shortages.
Goods spending fell 1.1 per cent last month, led by motor vehicles. A global shortage of semiconductors is hampering auto production. There were also decreases in spending on recreational goods as well as clothing and footwear.
Spending on services rose 1.0 per cent, a broad increase led by food services and accommodations. Credit-card data suggest spending on services like airfares and cruises as well as hotels and motels slowed in August amid soaring COVID-19 cases driven by the Delta variant. Fears about the virus knocked consumer sentiment to a more than 9½-year low in August.
Inflation continued to rise last month, fanned by the unrelenting supply constraints and the economy’s move toward normalcy after the upheaval caused by the pandemic. But the pace of increase is slowing.
The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, climbed 0.3 per cent in July. That was the smallest gain in five months and followed a 0.5-per-cent advance in June. In the 12 months through July, the so-called core PCE price index rose 3.6 per cent after a similar increase in June. The core PCE price index is the Federal Reserve’s preferred inflation measure for its flexible 2-per-cent target.
Fed chair Jerome Powell in a speech to the Jackson Hole economic conference on Friday defended his long-held view that high inflation would be transitory. Mr. Powell said the economy continued to make progress toward the U.S. central bank’s benchmarks for reducing its massive support, but stopped short of signalling the timing for any policy shift.
Stocks on Wall Street rose on Mr. Powell’s comments, with the S&P 500 and the Nasdaq hitting record highs. The dollar fell against a basket of currencies. U.S. Treasury prices were higher.
INCOME, SAVINGS RISE
High inflation chipped away at consumer spending last month. Consumer spending adjusted for inflation dipped 0.1 per cent. The so-called real consumer spending rose 0.5 per cent in June. Real consumer spending is slightly above the second-quarter average.
“Spending growth in the current quarter is still guaranteed to be far below the 11.6 per cent annualized rate of the first half of the year, but at least it is starting in positive territory,” said Lou Crandall, chief economist at Wrightson ICAP in Jersey City.
The government reported on Thursday that consumer spending grew at a robust 11.9-per-cent rate in the second quarter, accounting for much of the economy’s 6.6-per-cent growth pace, which raised the level of gross domestic product above its peak in the fourth quarter of 2019.
Economists at Goldman Sachs last week cut their growth estimate for the third quarter to a 5.5-per-cent rate from a 9-per-cent pace, citing high inflation and rising coronavirus infections.
The resurgence in global COVID-19 cases could cause more supply disruptions.
But the drag from slowing consumer spending this quarter is likely to be limited by a narrowing trade deficit and the replenishing of depleted inventories by businesses.
In another report on Friday, the Commerce Department said the goods trade deficit decreased 6.2 per cent to US$86.4-billion last month as imports fell and exports rose.
Retail inventories gained 0.4 per cent, while stocks of goods at wholesalers increased 0.6 per cent.
Over all, the economy remains supported by record corporate profits. Households accumulated at least US$2.5-trillion in excess savings during the pandemic. Growth is expected to pick up in the fourth quarter, in part driven by inventory accumulation.
The saving rate increased to 9.6 per cent last month from 8.8 per cent in June as some of the money disbursed by the government under the Child Tax Credit program to qualifying households was socked away. Personal income shot up 1.1 per cent after gaining 0.2 per cent in June.
Wages also rose as companies compete for scarce workers, increasing 1.0 per cent in July. Income at the disposal of households after accounting for inflation rebounded 0.7 per cent after three straight monthly declines. Household wealth is also being boosted by high stock-market prices and accelerating home prices.
“The overall position of the household sector is strong and consumers have plenty of buying power,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.
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