WASHINGTON (Reuters) – US consumer spending slowed in July as falling motor vehicle purchases due to shortages offset an increase in service spending, supporting opinions that economic growth will moderate in the third quarter amid a resurgence of COVID-19 infections.
But the groundwork for the recovery remains solid, with the Commerce Department report on Friday showing that wages are rising and Americans are increasing savings even further. Inflation seems to have peaked, which could preserve the purchasing power of households. Companies are also replenishing and exporting more goods, suggesting that the slowdown in growth this quarter could be temporary.
“There are clear downside risks to spending if more events and trips are canceled and more products are delayed to reach the shelves,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto. “But it’s a little early to throw in the towel on the economic outlook given support and wage savings trends and a likely boost in business investment, inventories and trade in the third quarter.”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.3% last month after advancing 1.1% in June. Last month’s rise coincided with economists ’expectations.
Demand is turning to services such as travel and leisure, but spending has been insufficient to offset falling commodity purchases, which are also being hit by shortages.
Expenditure on goods fell 1.1% last month, led by motor vehicles. The global shortage of semiconductors makes car production difficult. There were also decreases in spending on recreational items, as well as on clothing and footwear. However, spending on goods is 20% above its pre-pandemic level.
Expenditure on services increased by 1.0%, a broad increase led by food and accommodation services. Last month’s service spending was 1% above the February 2020 level. Healthcare, transportation and recreation have yet to make up for their pandemic losses.
Credit card data suggests that spending on services such as airfare and cruises, as well as hotels and motels, slowed in August, in an increase in COVID-19 cases driven by the Delta variant.
Fears about the virus dropped consumer sentiment to a low of more than 9-1 / 2 years in August.
Inflation continued to rise last month, fueled by constant supply restrictions and the shift from the economy to normal after the pandemic-induced disorder. But the pace of growth is slowing.
The personal consumption expenditure (PCE) price index, excluding volatile food and energy components, rose 0.3% in July. This was the smallest gain in five months and followed by a 0.5% advance in June. In the twelve months to July, the so-called PCE base price index rose 3.6% after a similar increase in June. The PCE base price index is the Federal Reserve’s preferred measure of inflation for its flexible 2% target.
Fed Chairman Jerome Powell, in a speech at the Jackson Hole economic conference, on Friday defended his long-term view that high inflation would be transitory. Powell said the economy continued to move toward U.S. central bank benchmarks to reduce its massive support, but stopped marking the time for any policy change.
Powell’s comments boosted US stocks, with record highs for the S&P 500 and Nasdaq.
The dollar fell against a basket of currencies. US Treasury prices rose.
INCOME, INCREASED SAVINGS
High inflation slowed consumer spending last month. Inflation-adjusted consumer spending fell 0.1%. So-called real consumer spending rose 0.5% in June. Real consumer spending is slightly above the second quarter average.
“Expenditure growth in the current quarter is still guaranteed well below the annualized rate of 11.6% in the first half of the year, but at least it starts in positive territory,” Lou Crandall said. chief economist at Wrightson ICAP in Jersey City.
The Atlanta Fed reduced its third-quarter GDP growth estimate to a rate of 5.1% from a rate of 5.7%. The resurgence of COVID-19 cases, which is global, could lead to further supply disruptions.
The economy grew at a rate of 6.6% in the second quarter, which raised the level of gross domestic product above its maximum in the fourth quarter of 2019.
But the drag on the slowdown in consumer spending this quarter is likely to be limited by a reduced trade deficit and replenishment of depleted inventories by businesses.
In another report on Friday, the Commerce Department said the trade deficit in goods narrowed 6.2 percent to $ 86.4 billion last month as imports fell and exports rose.
Retail inventories increased by 0.4%, while inventories of goods in wholesalers increased by 0.6%.
Overall, the economy continues to be supported by record corporate profits. Households accumulated at least $ 2.5 trillion in excess savings during the pandemic. Growth is expected to increase in the fourth quarter, driven in part by the build-up of inventories.
The savings rate rose to 9.6% last month from 8.8% in June as part of the money the government disbursed under the children’s home tax credit program was destroyed qualified. Personal income rose 1.1% after gaining 0.2% in June.
Wages also rose as companies competed for scarce workers, rising 1.0% in July. Household disposable income after accounting for inflation rose 0.7% after three consecutive monthly falls.
Household wealth is also being boosted by high stock market prices and accelerating house prices.
“The overall position of the home sector is strong and consumers have a lot of purchasing power,” said Conrad DeQuadros, senior economic advisor to Brean Capital in New York.
Report by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci