US consumer spending speeds up, declining savings raise concerns.
US Consumer Spending Surges, but Inflation Keeps Interest Rates Steady
WASHINGTON—In a boost to the US economy, consumer spending saw its largest increase in six months in July. Americans purchased more goods and services, signaling a positive trend. However, with monthly inflation rates slowing down, it is expected that the Federal Reserve will maintain unchanged interest rates next month.
The latest report from the Commerce Department, combined with other data showing a surprising decline in first-time unemployment benefit applications, has further reduced the risk of a recession this year.
While the current pace of consumer spending growth is impressive, it may not be sustainable. Households are depleting their excess savings accumulated during the COVID-19 pandemic. Additionally, millions of Americans will resume student debt repayments in October, and higher borrowing costs could make it more challenging for consumers to rely on credit cards for purchases.
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“Americans keep spending,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto. “The ‘soft landing’ view still holds, but there are some warning signs coming from the consumer as the savings rate continues to tick down.”
Consumer spending, which accounts for more than two-thirds of US economic activity, rose by 0.8 percent last month. June’s data was also revised slightly higher, showing a 0.6 percent increase instead of the previously reported 0.5 percent. Economists had predicted a 0.7 percent rise.
Spending on goods increased by 0.7 percent, primarily driven by purchases of products with a short lifespan such as pharmaceuticals, recreational items, groceries, and clothing. There were also notable increases in spending on recreational goods, vehicles, household furnishings and equipment, and other durable goods.
Services spending rose by 0.8 percent, fueled by portfolio management and investment advice services, housing and utilities, restaurants, and healthcare. Despite the anticipation surrounding movie releases and concerts, spending on recreation services only saw a marginal increase.
“This could suggest upside risks for services consumption in August,” said Veronica Clark, an economist at Citigroup in New York.
When adjusted for inflation, consumer spending saw a 0.6 percent increase, the largest gain since January. Real consumer spending, which accounts for inflation, also rose by 0.4 percent in June. This solid growth in July sets a positive trajectory for real consumer spending at the beginning of the third quarter, leading economists to raise their gross domestic product (GDP) estimates.
JPMorgan has increased its GDP estimate for the July–September quarter to a 3.5 percent annualized rate, up from the previous 2.5 percent pace. In the second quarter, the economy grew at a rate of 2.1 percent.
However, with the savings rate dropping to 3.5 percent in July, the lowest since November 2022, the outlook for consumer spending is less robust. In June, the savings rate stood at 4.3 percent. Some of the decline in July can be attributed to higher taxes, which resulted in a 0.2 percent decrease in disposable income after accounting for inflation.
Stocks on Wall Street are trading higher, and the dollar has strengthened against other currencies. US Treasury yields have fallen.
Tight Labor Market
Inflation, as measured by the personal consumption expenditures (PCE) price index, rose by 0.2 percent last month, matching June’s increase. Food prices increased by 0.2 percent, while energy prices edged up by 0.1 percent. Over the past 12 months, the PCE price index has risen by 3.3 percent, compared to a 3.0 percent increase in June.
Excluding the volatile food and energy components, the PCE price index saw a 0.2 percent gain, similar to the previous month. The core PCE price index, which excludes food and energy, increased by 4.2 percent year-on-year in July, up from a 4.1 percent rise in June.
The annual PCE inflation rates were influenced by a lower base of comparison from the previous year. The Federal Reserve tracks the PCE price indexes to monitor its 2 percent inflation target.
“But make no mistake, the monthly sequential momentum around 0.2 percent is exactly what Fed policymakers are looking for to get inflation back toward the 2 percent target,” said Gregory Daco, chief economist at EY-Parthenon in New York.
Since March 2022, the Fed has raised its policy rate by 525 basis points to the current range of 5.25 percent–5.50 percent. Financial markets anticipate that the
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