Data from the US Commerce Department shows that consumer spending rose by 0.2%. The rate has fallen from the 0.5% rise reported in July and is short of the 0.3% that many economists had been forecasting. Prices rose, but at the smallest rate for over 3 years, and the goods trade deficit narrowed by 8.3%, the fastest rate in nearly 2 year, giving reassurance that steady economic growth in the next quarter is to be expected. This was welcome news to Wall Street, which closed on a modest increase. The markets have faced a turbulent few months over fears the US economy may fall into recession.
Consumer spending equals 2 thirds of US economic activity. Housing outlays, financial services and insurance saw the greatest increases, but there were slight boosts across most sectors including healthcare, transportation, and recreation services. There was also an increase in the service industry. Spending at bars, restaurants, and hotels is considered by some to be a strong indicator of consumer confidence. There was a continued drop in spending on motor vehicles and parts, while the cheaper price of fuel caused a drop at the service stations. Although the labour market has slowed, wage gains have outperformed their estimates as has the savings rate, encouraging an optimistic outlook for the remainder of the financial year. Some analysts had predicted that the rise in savings was due to job market concerns, with the unemployment rate hitting 4% giving people reason to take precautions over their future spending. However, August’s data does not support this.
In regards to inflation, the personal consumption expenditures (PCE) price index rose 0.1% in August, as expected following a 0.2% rise in July. There was a 0.2% rise in the cost of services but balanced by a 0.2% decline in the price of goods. Over the last year the PCE has risen 2.2%, the smallest annual gain since February 2021. Core PCE inflation rose 2.7% in the last 12 months.
The Commerce Department’s Census Bureau also released data showing that the goods trade deficit narrowed by $8.6 billion, the largest fall since November 2022. This was attributed to a 1.6% fall in imports and a 2.4% increase in exports. Overall growth for the second quarter came in at 3.0%, with third quarter estimates averaging 2.9%.
There is however some disappointment for investors who may have hoped that a weaker report might have nudged the Federal Reserve into making another 50 basis point interest rate cut (like the one announced last week) in November. According to CME’s Fedwatch, odds went up to 52% from 50%. There is still an expectation of 25 basis point cuts in both November and December, with those odds falling to 48% from 50%. The U.S. central bank’s current interest rate is in the 4.75% to 5.00% range.
(Sources: reuters.com)
