Strong consumer spending seen underpinning US economy

Strong consumer spending seen underpinning US economy

FILE PHOTO: People shop at an H&M store during the grand opening of the The Hudson Yards develo
FILE PHOTO: People shop at an H&M store during the grand opening of the The Hudson Yards development, a residential, commercial, and retail space on Manhattan's West side in New York City, New York, U.S., March 15, 2019. REUTERS/Brendan McDermid/File Photo

WASHINGTON: US consumer spending increased solidly in July as households bought a range of goods and services, which could further allay financial market fears of a recession, but the strong pace of consumption is unlikely to be sustained amid tepid income gains.

The report from the Commerce Department on Friday (Aug 30) added to July trade and inventory data in suggesting that while the economy was slowing, it was not losing altitude rapidly for now.

But risks to the longest economic expansion in history are mounting, mostly from a year-long trade war between the United States and China.

The trade fight between the two economic giants has spooked financial markets and caused an inversion of the US yield curve, which has stoked fears that the economic expansion now in its 11th year is in danger of being interrupted by a recession.

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.6 per cent last month after an unrevised 0.3 per cent gain in June. Economists polled by Reuters had forecast consumer spending advancing 0.5 per cent last month.

The economy is largely losing speed as the stimulus from the White House's US$1.5 trillion tax-cut package and a government spending blitz fades. The US-China trade conflict has weighed heavily on manufacturing and business investment, which contracted in the second quarter.

Given the trade war-driven weakness in business investment and manufacturing, slowing global growth as well as persistently low domestic inflation, the Federal Reserve is expected to cut interest rates again next month.

Fed Chairman Jerome Powell said last week that the economy was in a "favorable place," but reiterated that the US central bank would "act as appropriate" to keep the economic expansion on track. The Fed lowered its short-term interest rate by 25 basis points last month for the first time since 2008, citing trade tensions and slowing global growth.

US financial markets were little moved by the data.

Consumer prices as measured by the personal consumption expenditures (PCE) price index rose 0.2 per cent in July as a drop in the cost of food was offset by a surge in energy goods and services. The PCE price index edged up 0.1 per cent in June.

In the 12 months through July, the PCE price index increased 1.4 per cent after gaining 1.3 per cent in June.

Excluding the volatile food and energy components, the PCE price index rose 0.2 per cent last month, matching June's increase. That kept the annual increase in the so-called core PCE price index at 1.6 per cent in July.

The core PCE index is the Fed's preferred inflation measure and has undershot the US central bank's 2 per cent target this year.

When adjusted for inflation, consumer spending increased 0.4 per cent in July. This so-called real consumer spending rose 0.2 per cent in June. Last month's jump in core consumer spending suggested consumption remained strong early in the third quarter after it surged at its fastest pace in 4.5 years in the second quarter.

The economy grew at a 2.0 per cent annualised rate in the second quarter, slowing from the January-March quarter's brisk 3.1 per cent pace. Growth estimates for the third quarter range from a 1.5 per cent rate to a 2.3 per cent pace.

Last month, spending on goods surged 0.9 per cent, driven by outlays on recreational goods and motor vehicles. Spending on services increased 0.5 per cent.

Consumer spending in July was supported by savings as personal income edged up 0.1 per cent, the smallest rise since last September. That followed a 0.5 per cent increase in June.

Wages increased 0.2 per cent and personal interest income fell 1.8 per cent. Savings fell to US$1.27 trillion, the lowest level since November 2018, from US$1.32 trillion in June.

Source: Reuters