US Consumer Spending Remains Strong as Inflation Eases

U.S. consumer spending showed resilience in August, rising slightly less than expected, while inflation continued to decline. This trend suggests that solid economic growth is likely to persist in the third quarter, with the annual price increase being the smallest in over three and a half years.

Key Takeaways

• Consumer spending rose by 0.2% in August, following a 0.5% increase in July.
• Spending on services increased by 0.4%, while goods spending dipped by 0.1%.
• The personal consumption expenditures (PCE) price index rose by 0.1%, marking a 2.2% annual increase.
• The goods trade deficit narrowed significantly, indicating a potential boost to GDP.

Consumer Spending Trends

Consumer spending, which constitutes more than two-thirds of U.S. economic activity, rose by 0.2% in August. This increase follows an unrevised 0.5% gain in July, although it fell short of economists' expectations of a 0.3% rise. The spending was primarily concentrated in services, which saw a 0.4% increase, driven by outlays on housing, utilities, and financial services.

However, spending on goods decreased by 0.1%, largely due to a decline in purchases of motor vehicles and parts, as well as lower receipts at service stations amid falling gasoline prices. Consumers also shifted towards more affordable store-brand items, leading to a drop in food and beverage sales.

Inflation Eases

The PCE price index, a key measure of inflation, rose by 0.1% in August, consistent with expectations. Over the past year, the index increased by 2.2%, the smallest annual gain since February 2021. Excluding food and energy, core inflation advanced by 2.7% year-over-year.

This decline in inflation is significant as it aligns with the Federal Reserve's target of 2%. The Fed recently cut its benchmark interest rate by 50 basis points, marking the first reduction since 2020. Financial markets are now pricing in a 52% chance of another half-percentage-point cut at the upcoming policy meeting in November.

Economic Outlook

Despite the slight dip in consumer spending, economists remain optimistic about the economic outlook. Michael Pearce, deputy chief U.S. economist at Oxford Economics, stated that the resilience of consumer spending and strong wage gains provide a solid foundation for future growth. The upcoming employment report is expected to offer further insights into the labor market and potential future interest rate adjustments.

The Atlanta Fed has raised its third-quarter GDP growth estimate to 3.1%, primarily due to the narrowing trade deficit. This positive economic data suggests that the U.S. economy is on a stable path, with consumer spending likely to continue supporting growth in the coming months.

Conclusion

In summary, U.S. consumer spending remains robust, with inflation showing signs of easing. The combination of strong wage growth and a higher saving rate bodes well for future consumer spending, even as the labor market shows signs of slowing. As the economy continues to navigate these changes, the Federal Reserve's decisions on interest rates will be closely watched by investors and consumers alike.

Sources

• US consumer spending resilient; inflation continues to abate, Yahoo Finance Canada.