Consumer Spending Growth in the U.S. and Inflation Slowdown
(WASHINGTON) - In August, consumer spending in the United States grew moderately, indicating that the economy has maintained some of its strong momentum during the third quarter, while inflationary pressures continue to ease. According to a report released on Friday by the Bureau of Economic Analysis from the Department of Commerce, consumer spending, which accounts for more than two-thirds of the country's economic activity, increased by 0.2% last month, following an unadjusted improvement of 0.5% in July. Economists surveyed by Reuters had predicted a 0.3% rise.
Even though the labor market has shown signs of slowing down, consumer spending remains supported by still-solid wage income. The annual revisions of the national accounting statistics published on Thursday revealed broader wage growth in the second quarter than previously estimated. Additionally, the savings rate also turned out to be higher than expected. This increase in income and savings is a positive sign for the trajectory of consumer spending for the remainder of the year. There were concerns that consumers were relying more on their savings to sustain their spending. Instability in the labor market, with an unemployment rate above 4%, had raised fears about precautionary savings that could negatively impact spending. Last week, the Federal Reserve cut its benchmark interest rate by 50 basis points, bringing it to a range of 4.75%-5%, marking the first reduction in borrowing costs since 2020. Jerome Powell, the Fed Chair, noted that this action aimed to demonstrate the commitment of monetary policymakers to maintain a low unemployment rate. Growth projections for the third quarter are around 2.9% annually, and consumer spending is expected to keep the pace set during the April to June period, following an economic expansion of 3.0% in the second quarter. On the other hand, the Personal Consumption Expenditures (PCE) price index rose by 0.1% in August, after an unadjusted increase of 0.2% in July. Economists had anticipated a 0.1% advance. Year-over-year, as of August, the PCE price index increased by 2.2%, down from 2.5% in July.
When excluding the volatile food and energy components, the PCE index rose by 0.1%, following an unadjusted increase of 0.2% in July. For the 12 months leading up to August, core inflation showed a rise of 2.7%, compared to 2.6% the previous month. The Federal Reserve monitors PCE figures to achieve its inflation target of 2%. Between 2022 and 2023, the Fed raised its official interest rate by 525 basis points.
In summary, the economic outlook shows certain signs of stability, with consumer spending that, although moderate, presents good indicators such as increased income and the savings rate. This could be a key factor in maintaining economic strength in the near future. However, it's important for consumers to take a cautious approach to their financial decisions, given the rising cost of living and instability in the labor market. Considering additional savings and diversifying investments may be a sensible path during these times.
