U.S. Consumer Spending Shows Solid Growth in July

By Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer spending increased solidly in July, indicating that the economy remains stable early in the third quarter, arguing against a half-percentage-point interest rate cut by the Federal Reserve next month.

The Commerce Department reported that prices rose moderately last month, helping to curb inflation. Conversely, a jump in the unemployment rate to 4.3% in July raised recession concerns, prompting discussions among financial markets and some economists regarding a potential 50-basis-point rate reduction when the Federal Reserve is anticipated to ease policy in September.

Fed Chair Jerome Powell signaled last week that a rate cut was on the horizon due to worries about the labor market. “There is nothing here to push the Fed to a half-point cut,” asserted Conrad DeQuadros, a senior economic advisor at Brean Capital. “This is not the kind of spending growth associated with recession.”

Consumer spending, which makes up over two-thirds of U.S. economic activity, rose 0.5% in July after a 0.3% increase in June, in line with economists’ expectations. After adjusting for inflation, spending gained 0.4%, reflecting momentum from the second quarter, during which it contributed to a 3.0% annualized GDP growth.

The economy grew by 1.4% in the first quarter of the year, while the Atlanta Fed has upgraded its third-quarter GDP growth forecast to 2.5% from 2.0%.

Spending increased across both goods and services, particularly for motor vehicles and parts, as well as housing, utilities, food, recreation services, financial services, and healthcare.

Although momentum in the labor market is slowing, decent wage growth continues to support spending, primarily driven by reduced hiring rather than layoffs. Personal income rose 0.3% last month, while wages also climbed 0.3%.

Saving Rate Declines

The saving rate dipped to 2.9%, its lowest since June 2022, down from 3.1% in June. Economists disagree on the implications of this decline. Some suggest it may indicate that households are drawing down savings to keep spending levels, potentially affecting future consumption. Others argue that strong household balance sheets due to rising home and stock prices mitigate concerns.

The increase in employment gains was last week revised upward by the Labor Department due to underreporting related to undocumented immigrants.

“The Bureau of Economic Analysis could be undercounting income from recent immigrants, whose economic activity is more challenging to measure than longer-established workers,” noted Bill Adams, chief economist at Comerica Bank.

Stocks on Wall Street rose following the reports. The dollar strengthened against a basket of currencies, while U.S. Treasury prices declined. The upcoming employment report scheduled for next Friday will likely influence September’s rate cut.

The personal consumption expenditures (PCE) price index rose by 0.2% in July, aligning with economists’ expectations. Goods prices remained unchanged following a two-month decline, while services prices increased for the third consecutive month.

In the year through July, the PCE price index increased 2.5%. Excluding food and energy components, core inflation remained in line with previous months’ increases, supporting the Fed’s inflation target.

“The data suggest inflation is on track to hit the Fed’s 2% target,” remarked Pooja Sriram, an economist at Barclays. “We maintain our baseline call for three Fed rate cuts this year.”