Friday’s Commerce Department report, which showed inflation to remain high in August, increased the risk of consumer spending freezing in the third quarter, even as spending accelerates again in September. This is called real consumer expenditure, corrected for inflation, which goes into the calculation of gross domestic product.
“Third quarter consumer spending is only a small gain,” said Tim Quinlan, senior economist at Wells Fargo in Charlotte, North Carolina. “If COVID cases continue to decline and sentiment turns positive, it is possible to end this tumultuous year more solidly. “
Consumer spending, which accounts for more than two-thirds of US economic activity, rebounded 0.8% in August. Data for July has been revised down to show spending slipping 0.1% instead of gaining 0.3% as previously reported.
Consumption was boosted by a 1.2% increase in purchases of goods, reflecting higher spending on food and household items as well as leisure items, which offset lower spending on motor vehicles. A global semiconductor shortage is reducing automotive production.
Spending on goods fell 2.1% in July. Spending on services rose 0.6% in August, supported by housing, utilities and health care. Services, which account for the bulk of consumer spending, rose 1.1% in July. Spending returns to services from goods, but the resurgence of coronavirus cases, driven by the Delta variant, has reduced demand for air travel, hotel accommodation, and sales in restaurants and bars.
Economists polled by Reuters predicted a 0.6% increase in consumer spending in August.
Inflation continued its upward trend in August, although price pressures are likely to have peaked. The personal consumption expenditure price index (PCE), excluding the volatile components of food and energy, rose 0.3% after increasing by the same margin in July. In the 12 months to August, the so-called core PCE price index rose 3.6%, matching July’s gain.
The core PCE price index is the Federal Reserve’s preferred inflation measure for its flexible target of 2%. The US central bank last week raised its core PCE inflation projection for this year to 3.7% from 3.0% in June.
The Fed said it would likely start cutting its monthly bond purchases as early as November and signaled interest rate hikes could follow faster than expected. Fed Chairman Jerome Powell, who has maintained high inflation is transient, told lawmakers on Thursday he expected some relief in the coming months.
Still, inflation could stay high for some time. A survey by the Institute for Supply Management on Friday showed that manufacturers experienced longer delays in delivering raw materials to factories and paid higher prices for inputs in September.
Stocks on Wall Street were higher. The dollar fell against a basket of currencies. US Treasury prices were mixed.
High inflation reduces spending. Real consumer spending rose 0.4% in August after declining downward by 0.5% in July. With data for August and July in hand, economists predicted that growth in consumer spending would likely slow to an annualized rate of around 1% in the third quarter.
Consumer spending grew at a robust rate of 12.0% in the April-June quarter, accounting for much of the economy’s 6.7% 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 2.3% from 3.2%. The slower growth was reinforced by a third Commerce Department report showing stable construction spending in August.
“Even with easing growth, we continue to expect the Fed to announce the start of the pullout at the early November meeting,” said Michael Feroli, chief US 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 on the decline, which is already leading to an increase in demand for travel and other high contact services. Companies have to replenish depleted stocks, which will keep factories running.
A fourth report from the University of Michigan showed that consumer confidence rose for the first time in three months in September. But a Conference Board survey this week showed consumer confidence fell to its lowest level in seven months in September.
Although personal income rose only 0.2% in August after rising 1.1% in July, as an increase in government child tax credit payments was offset by a decrease in government checks. Unemployment insurance linked to the pandemic, wages rise as companies compete for scarce workers. Wages rose 0.5% in August, which should help keep spending strong.
With high inflation, real disposable income fell 0.3% after increasing 0.7% in July. The savings rate fell to a still high level of 9.4% from 10.1% in July.
“Households still have a long way to go given rising jobs and wages, soaring net worth and massive excess savings,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto. “However, rising prices are eating away at purchasing power, exacerbating the continued lack of supply.”