Motor vehicles restrain U.S. consumer spending; monthly inflation slows

WASHINGTON (Reuters) – U.S. consumer spending slowed in July as a decline in motor vehicle purchases due to shortages offset a rise in outlays on services, supporting views that economic growth will moderate in the third quarter amid a resurgence in COVID-19 infections.

FILE PHOTO: Automobiles are shown for sale at a car dealership in Carlsbad, California, U.S. May 2, 2016. REUTERS/Mike Blake/File Photo

But the slowdown in spending will probably not be as sharp as currently anticipated, with the report from the Commerce Department on Friday showing Americans boosting savings. Inflation also appears to have peaked, which could preserve households’ purchasing power.

“While there are clear downside risks to spending if more events and trips are canceled and more products are delayed getting to shelves, it’s a bit early to throw in the towel on the economic outlook given supportive wage and saving trends,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.3% last month. Data for June was revised up to show spending advancing 1.1% instead of 1.0% as previously reported. Last month’s rise in consumer spending was in line with economists’ expectations.

Demand is rotating back to services like travel and leisure, but spending has not been sufficient to compensate for the drop in goods, whose purchases are also being impacted by shortages.

Goods spending fell 1.1% last month, led by motor vehicles. A global shortage of semiconductors is hampering auto production. There were also decreases in spending on recreational goods as well as clothing and footwear.

Spending on services rose 1.0%, a broad increase led by food services and accommodations. Credit card data suggests spending on services like airfares and cruises as well as hotels and motels slowed in August amid soaring COVID-19 cases driven by the Delta variant.

Inflation continued to rise last month, fanned by the unrelenting supply constraints and the economy’s move toward normalcy after the upheaval caused by the pandemic. But pace of increase is slowing.

The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, gained 0.3% in July after advancing 0.5% in June. In the 12 months through July, the so-called core PCE price index rose 3.6% after a similar increase in June.

The core PCE price index is the Federal Reserve’s preferred inflation measure for its flexible 2% target.

U.S. stocks opened higher. The dollar gained against a basket of currencies. U.S. Treasury prices rose.

INCOME, SAVINGS RISE

Fed Chair Jerome Powell’s highly anticipated speech to the Jackson Hole economic conference on Friday will be gleaned for clues on when the U.S. central bank’s will start scaling back its $120 billion in monthly bond purchases.

Powell has maintained that high inflation, which is chipping way at spending, will be transitory.

Consumer spending adjusted for inflation dipped 0.1% in July. The so-called real consumer spending rose 0.5% in June.

Prices pressures, together with rising coronavirus infections last week prompted economists at Goldman Sachs to cut their growth estimate for the third quarter to a 5.5% rate from a 9% pace. Bank of America Securities slashed its GDP growth estimate for this quarter to a 4.5% pace from a 7.0% rate.

The government reported on Thursday that consumer spending grew at a robust 11.9% annualized rate in the second quarter, accounting for much of the economy’s 6.6% growth pace, which raised the level of gross domestic product above its peak in the fourth quarter of 2019.

The drag from slowing consumer spending this quarter is likely to be limited by a narrowing trade deficit and the replenishing of depleted inventories by businesses.

In another report on Friday, the Commerce Department said the goods trade deficit decreased 6.2% to $86.4 billion last month. Retail inventories rose 0.4%, while stocks of goods at wholesalers increased 0.6%.

Overall, the economy remains supported by record corporate profits. Households accumulated at least $2.5 trillion in excess savings during the pandemic.

The saving rate increased to 9.6% last month from 8.8% in June as some of the money disbursed by the government under the Child Tax Credit program to qualifying households was socked away. Personal income rose 1.1%. Record high stock market prices and accelerating home prices are boosting household wealth.

Wages are also rising as companies compete for scarce workers. Wages increased 1.0% in July.

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