U.S. consumer spending surged in August, but outlays adjusted for inflation were weaker than initially thought in the prior month, reinforcing expectations that economic growth slowed in the third quarter as COVID-19 infections flared up.
The report from the Commerce Department on Friday, which showed inflation remaining hot in August, raised the risk of consumer spending stalling in the third quarter, even if spending accelerates further in September. Inflation-adjusted, or the so-called real consumer spending is what goes into the calculation of gross domestic product.
“Third quarter consumer spending is on track for only a scant gain,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina. “If COVID cases keep falling and sentiment turns positive, there is scope for a more solid finish to this tumultuous year.”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rebounded 0.8 per cent in August. Data for July was revised down to show spending dipping 0.1 per cent instead of gaining 0.3 per cent as previously reported.
Consumption was boosted by a 1.2 per cent rise in purchases of goods, reflecting increases in spending on food and household supplies as well as recreational items, which offset a drop in motor vehicle outlays. A global shortage of semiconductors is undercutting the production of automobiles.
Goods spending fell 2.1 per cent in July. Spending on services rose 0.6 per cent in August, supported by housing, utilities and health care. Services, which account for the bulk of consumer spending, increased 1.1 per cent in July. Spending is shifting back to services from goods, but the resurgence in coronavirus cases, driven by the Delta variant, crimped demand for air travel, hotel accommodation and sales at restaurants and bars.
Economists polled by Reuters had forecast consumer spending increasing 0.6 per cent in August.
Inflation maintained its upward trend in August, though price pressures have probably peaked. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, climbed 0.3 per cent after increasing by the same margin in July. In the 12 months through August, the so-called core PCE price index increased 3.6 per cent, matching July’s gain.
The core PCE price index is the Federal Reserve’s preferred inflation measure for its flexible 2 per cent target. The U.S. central bank last week upgraded its core PCE inflation projection for this year to 3.7 per cent from 3.0 per cent back in June.
The Fed said it would likely begin reducing its monthly bond purchases as soon as November and signalled interest rate increases may follow more quickly than expected. Fed Chair Jerome Powell, who has maintained that high inflation is transitory, told lawmakers on Thursday that he anticipated some relief in the months ahead.
Still, inflation could remain high for a while. A survey from the Institute for Supply Management on Friday showed manufacturers experienced longer delays getting raw materials delivered to factories and paid higher prices for inputs in September.
Stocks on Wall Street were higher. The dollar fell against a basket of currencies. U.S. Treasury prices were mixed.
High inflation is cutting into spending. Real consumer spending rose 0.4 per cent in August following a downwardly revised 0.5 per cent drop in July. With the August and July data in hand, economists predicted that growth in consumer spending would probably brake to around a 1 per cent annualized rate in the third quarter.
Consumer spending grew at a robust 12.0 per cent rate in the April-June quarter, accounting for much of the economy’s 6.7 per cent growth pace. The level of GDP is now above its peak in the fourth quarter of 2019.
The Atlanta Fed cut its GDP estimate for the quarter to a 2.3 per cent rate from a 3.2 per cent pace. Slower growth was reinforced by a third report from the Commerce Department showing construction spending flat in August.
“Even with the softening growth picture, we continue to expect the Fed to announce the start of tapering at the early November meeting,” said Michael Feroli, chief U.S. economist at JPMorgan in 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 trending down, which is already leading to a rise in demand for travel and other high-contact services. Businesses need to replenish depleted inventories, which will keep factories humming.
A fourth report from the University of Michigan showed consumer sentiment ticked higher for the first time in three months in September. But a survey from the Conference Board this week showed consumer confidence dropping to a seven-month low in September.
Though personal income gained only 0.2 per cent in August after rising 1.1 per cent in July as an increase in Child Tax Credit payments from the government was offset by decreases in unemployment insurance checks related to the pandemic, wages are rising as companies compete for scarce workers. Wages rose 0.5 per cent in August, which should help to keep spending supported.
With inflation high, real disposable income dropped 0.3 per cent after increasing 0.7 per cent in July. The saving rate fell to a still-high 9.4 per cent from 10.1 per cent in July.
“Households still have plenty left in the tank given rising employment and wages, soaring net worth and massive excess savings,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “However, rising prices are eating into spending power, compounding the ongoing lack of supply.”
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.