Consumer spending rose in July as expected

US consumer spending rose strongly in July, suggesting the economy remained strong at the start of the third quarter and countering a half-percent interest rate cut by the Federal Reserve next month.

A report from the Department of Commerce on Friday also showed prices rose moderately last month, reducing inflation.

A jump in the unemployment rate to a nearly three-year high of 4.3% in July fueled fears of a recession, leading financial markets and some economists to put a 50-point cut on the table when the US central bank starts working. the widely anticipated policy of September.

Fed Chairman Jerome Powell last week indicated that a rate cut is imminent, due to concerns about the labor market.

“There’s nothing here that would push the Fed to cut points,” said Conrad DeQuadros, chief economic adviser at Brean Capital. “This is not the type of spending that is associated with a recession.”

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.5% last month after advancing an unrevised 0.3% in June, the Commerce Department’s Bureau of Economic Analysis reported. The increase is in line with what economists had expected.

After adjusting for inflation, consumer spending gained 0.4% after rising 0.3% in June, and suggested that spending maintained momentum from the second quarter, when it helped boost gross domestic product growth to an annual average of 3.0%.

The economy grew at a pace of 1.4% in the January to March quarter. The Atlanta Fed raised its third-quarter GDP growth estimate to 2.5% from 2.0%.

The increase in spending was on all goods and services, as well as the cost of automobiles and lead parts. Consumers also spent more on housing and utilities, food and beverages, leisure, and financial services and insurance. They also increased spending on health care, visiting restaurants and bars, and staying in hotels.

Consumers also bought more leisure goods and cars as well as furniture and household goods.

Although labor market momentum has slowed, it continues to generate modest wage growth that is helping to bolster spending. The decline in the labor market is mainly driven by downsizing rather than layoffs.

Personal income rose 0.3% last month after gaining 0.2% in June. Wages rose 0.3% after rising 0.2% in June.

The saving rate is decreasing

The savings rate fell to 2.9%, the lowest rate since June 2022, from 3.1% in June. Economists, however, did not agree on the results of the rate drop as some say the government is not fully taking the money earned by undocumented immigrants.

Some argue that households are pulling back on savings to maintain spending, which could jeopardize future spending. Yet another group was undeterred by the decline in the savings rate, pointing to strong household balance sheets against a backdrop of higher house prices and higher stocks.

Undocumented immigrants were also cited as one of the factors behind the Labor Department’s Bureau of Labor Statistics’ estimate last week that employment gains exceeded 68,000 jobs per month in the 12 months through March.

The so-called benchmark review estimate is based on a data set based on employer reports to state unemployment insurance programs. The data excludes undocumented immigrants, a group that economists believe contributed to last year’s strong job growth.

“The BEA may be undercounting the income of recent immigrants, whose economic activity is more difficult to measure than workers who have lived in the US for a long time,” said Bill Adams, economist at Comerica Bank.

“That would mean the savings rate is higher than currently reported, and will be revised higher when more accurate employment and wage data become available.”

Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies, while US Treasury yields fell.

The August employment report scheduled for release next Friday could determine the size of September’s rate cut.

The personal consumption expenditures (PCE) price index rose 0.2% last month after an unrevised gain of 0.1% in June, the report also showed. Commodity prices were unchanged after falling for two straight months. Declines in prices of automobiles and other durable goods were offset by gains in the sale of food and other perishable goods.

Services costs rose 0.2% for the third consecutive month, boosted by increases in housing and utilities, leisure services, and financial services and insurance. Health care prices were unchanged while transportation costs fell for the fourth month in a row.

In the 12 months to July, the PCE price index rose 2.5%, matching June’s gain. The increase in PCE inflation was in line with economic expectations.

Excluding the volatile food and energy components, the PCE price index rose 0.2% last month, matching June’s increase. In the 12 months to July, core inflation rose 2.6% after advancing at the same rate in June.

Inflation rose 1.7% year-on-year in the three months to July. The Fed is tracking PCE inflation rates at its 2% inflation target, and has kept its policy rate in the current range of 5.25% to 5.50% for more than a year, raising it by 525 basis points in 2022 and 2023. .

“The data suggest that inflation is about to reach the Fed’s 2% target,” said Pooja Sriram, economist at Barclays. “We maintain our initial call for three Fed rate cuts this year.”

—By Lucia Mutikani, Reuters