Washington, Oct. 1 (BUS) – US consumer spending rose in August, but inflation-adjusted expenditures were weaker than initially thought the previous month, bolstering expectations that economic growth slowed in the third quarter with the outbreak of COVID-19 infections.
Friday’s report from the Commerce Department, which showed inflation continued to rise in August, raised the risks of consumer spending stalling in the third quarter, even if consumption accelerated further in September.
Reuters reported that the inflation rate or the so-called real consumer spending is what enters into the calculation of the gross domestic product.
“Consumer spending in the third quarter is on track with only a small gain,” said Tim Quinlan, chief economist at Wells Fargo in Charlotte, North Carolina. “If COVID cases continue to decline and sentiment turns positive, there is room for a more solid end to this turbulent year.”
Consumer spending, which accounts for more than two-thirds of US economic activity, rebounded 0.8% in August. July data was revised to show spending declining 0.1% instead of gaining 0.3% as previously reported.
Consumption was fueled by a 1.2% rise in merchandise purchases, reflecting increased spending on food and household supplies as well as leisure items, which more than offset the decline in automobile expenditures.
A global shortage of semiconductors is undermining auto production, hurting sales.
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, increased 1.1% in July.
Spending shifts back to services from goods, but the resurgence of coronavirus cases during the summer, driven by the delta variable, has reduced demand for air travel and hotel accommodations as well as sales in restaurants and bars.
Economists polled by Reuters had expected consumer spending to increase 0.6 percent in August.
Inflation maintained its upward trend in August, although price pressures may have peaked.
The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, rose 0.3% after rising by the same margin in July.
In the twelve months through August, the so-called core PCE price index rose 3.6%, matching July’s gain.
The core PCE price index is the Fed’s preferred inflation measure for its 2% flexible target.
The Federal Reserve last week raised its forecast for core PCE inflation for this year to 3.7% from 3.0% last June.
The central bank indicated that interest rate increases may follow faster than expected.
Federal Reserve Chairman Jerome Powell, who emphasized that high inflation is temporary, told lawmakers Thursday that he expects some relief in the coming months.
However, inflation may remain high for a while.
A survey by the Institute of 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 mostly higher. The dollar fell against a basket of currencies. US Treasuries were mixed.
slowing growth
High inflation limits spending.
Real consumer spending rose 0.4% in August. This followed a downward-adjusted decline of 0.5% in July, which was previously reported as a 0.1% decline.
With August and July data in hand, economists forecast growth in consumer spending likely to curb around 1% annual rate in the third quarter.
Consumer spending grew at a solid annual rate of 12.0% in the April-June quarter, which is a large part of the economy’s 6.7% pace of growth.
The level of GDP is now above its peak in the fourth quarter of 2019. In the wake of the consumer spending data, economists at JPMorgan lowered their third-quarter GDP estimates to 4.0% from the 5.0% rate.
Overall, the economy is still supported by record corporate earnings.
Families have amassed at least $2.5 trillion in excess savings during the pandemic. Coronavirus infections are trending down, already driving up demand for travel and other highly connected services.
Companies need to replenish depleted stocks, which will keep factories running constantly.
A third report released Friday from the University of Michigan showed that consumer confidence rose for the first time in three months in September.
But a survey from the Conference Board this week showed consumer confidence fell to a seven-month low in September.
Although personal income rose only 0.2% in August after rising 1.1% in July as the increase in child tax credit payments from the government was offset by a drop in unemployment insurance checks related to the pandemic, wages are rising with competition Companies on scarce labor.
Wages rose 0.5% in August, which should help keep spending subsidized.
But inflation is eroding consumers’ purchasing power, as disposable income for households rose 0.1% after a 1.1% increase in July. The savings rate fell to 9.4% from 10.1% in July.
“Families still have a lot in the tank due to high employment and wages, high net worth and massive savings,” said Sal Gutierre, chief economist at BMO Capital Markets in Toronto.
“However, higher prices undermine purchasing power, exacerbating the ongoing shortage of supply.”
NS