U.S. Consumer Spending and Economic Outlook

By Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer spending increased slightly less than expected in August, suggesting some moderation in economic growth for the third quarter. Notably, the annual rise in prices was the smallest in over 3.5 years.

A solid pace of economic growth this quarter remains possible, however, as other data from the Commerce Department indicated that the goods trade deficit narrowed by the most in nearly two years last month.

Economists did not interpret the spending and inflation data as weak enough to prompt the Federal Reserve to implement another 50 basis points interest rate cut in November, as some investors had hoped.

“All things considered, this month’s report does not nudge the Fed in the direction of another forceful 50 basis points cut in November,” said Olu Sonola, head of U.S. economic research at Fitch Ratings. “Two 25 basis points cuts still seem more likely in November and December.”

Consumer spending, which constitutes over two-thirds of U.S. economic activity, rose by 0.2% last month, following an unrevised 0.5% gain in July, according to the Commerce Department’s Bureau of Economic Analysis. Economists polled by Reuters had anticipated a 0.3% increase.

Spending was primarily focused on services, with significant outlays on housing and financial services, as well as increases in healthcare, transportation, and recreation services. Spending at bars and restaurants, along with hotel stays, also saw boosts. However, goods spending was affected by a decline in motor vehicle purchases and a drop in receipts at service stations due to cheaper gasoline prices.

Despite the mixed performance in goods spending, expenditures on nondurable goods and recreational vehicles rose. Consumer spending appears to be bolstered by solid wage gains, even though the labor market has shown signs of slowdown.

Revisions to national accounts data published on Thursday indicated stronger wage and salary growth in the second quarter than previously estimated, along with a higher saving rate. This bodes well for consumer spending for the remainder of the year.

Concerns had been expressed that consumers might be drawing down their savings to finance spending, especially against the backdrop of rising unemployment above 4%, raising the notion of precautionary savings which could detract from overall spending.

Ebbing Price Pressures

The personal consumption expenditures (PCE) price index rose 0.1% in August, following an unrevised 0.2% increase in July. Economists had forecast a 0.1% advancement in PCE inflation.

Goods prices fell by 0.2% after remaining unchanged in July, but this drop was offset by a 0.2% rise in service costs that followed a similar gain in July.

In the year through August, the PCE price index increased 2.2%, marking the smallest year-on-year gain since February 2021, down from a 2.5% rise in July.

When excluding food and energy, the PCE price index still increased by 0.1% after a 0.2% rise in July, with core inflation rising 2.7% over the same 12 months.

Investors remained hopeful for another significant rate cut, with financial markets estimating about a 52% chance of a half-percentage-point cut at the U.S. central bank’s upcoming November meeting, a slight rise from previous estimates. Probabilities for a 25 basis points reduction fell to approximately 48%.

Last week, the U.S. central bank cut its benchmark overnight interest rate by 50 basis points to the 4.75%-5.00% range, marking the first reduction in borrowing costs since 2020, following a series of hikes totaling 525 basis points during 2022 and 2023.

As a response, the dollar declined against a basket of currencies, while U.S. Treasury prices saw a rise.

A report from the Commerce Department’s Census Bureau revealed that the goods trade deficit contracted by $8.6 billion, or 8.3%, in August, bringing it down to $94.3 billion. This was the most significant dollar amount drop since November 2022, resulting from a 1.6% fall in imports while goods exports increased by 2.4%. Trade has been a detractor from gross domestic product for the previous two quarters.

Conrad DeQuadros, senior economic advisor at Brean Capital, stated, “The sharply lower estimate of the trade deficit for August still puts real GDP in the third quarter on track for a gain of 2.5% to 2.75% on our GDP arithmetic.”

Growth estimates for the third quarter are mostly hovering around a 2.9% annualized rate, following a 3.0% growth pace in the previous April-June quarter.