U.S. consumer spending beats expectations; inflation still hot




 

By Lucia Mutikani

WASHINGTON(Reuters) -U.S. consumer spending increased more than expected in August, but consumption was weaker than initially thought in the prior month, keeping intact expectations that economic growth slowed in the third quarter amid a resurgence in COVID-19 infections.

The report from the Commerce Department on Friday also showed inflation remaining hot in August, though price pressures have likely peaked. The Federal Reserve last week raised its inflation projections for this year and said it would likely begin reducing its monthly bond purchases as soon as November.

"Inflation is still hot but it is no longer red hot, and it probably won't grow any hotter unless consumers clear the store shelves again like they did during the economy's reopening at the start of the summer," said Christopher Rupkey, chief economist at FWDBONDS in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rebounded 0.8% in August. Data for July was revised down to show spending dipping 0.1% instead of gaining 0.3% as previously reported.

Consumption was boosted by a 1.2% rise in purchases of goods, reflecting increases in spending on food and household supplies as well as recreational goods, which offset a drop in motor vehicle outlays.

A global shortage of semiconductors is undercutting the production of automobiles, hurting sales. Goods spending fell 2.1% in July. Spending on services rose 0.6% in August, supported by housing, utilities and health care. That followed a 1.1% increase in July.

Economists polled by Reuters had forecast consumer spending increasing 0.6% in August. Inflation maintained its upward trend in August. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, climbed 0.3% after increasing by the same margin in July.

In the 12 months through August, the so-called core PCE price index increased 3.6%, matching July's gain.

The core PCE price index is the Federal Reserve's preferred inflation measure for its flexible 2% target. The Fed last week upgraded its core PCE inflation projection for this year to 3.7% from 3.0% back in June. The central bank signaled interest rate increases may follow more quickly than expected.

Fed Chair Jerome Powell told lawmakers on Thursday that he anticipated some relief from high inflation in the months ahead.

U.S. stocks opened higher. The dollar fell against a basket of currencies. U.S. Treasury prices were mixed.

SLOWING GROWTH

Though spending is shifting back to services from goods, the flare up in coronavirus cases in the summer, driven by the Delta variant, crimped demand for air travel and hotel accommodation as well as sales at restaurants and bars. Services account for the bulk of consumer spending.

When adjusted for inflation, consumer spending rose 0.4% in August. The so-called real consumer spending dropped 0.5% in July, revised down from the previously reported 0.1% dip.

That fits in expectations for a sharp moderation in consumer spending in the third quarter after it grew at a robust 12.0% annualized rate in the April-June quarter, accounting for much of the economy's 6.7% growth pace.

The level of gross domestic product is now above its peak in the fourth quarter of 2019. Growth estimates for the third quarter are below a 5.0% rate.

Overall, the economy remains supported by record corporate profits. Households accumulated at least $2.5 trillion in excess savings during the pandemic. Growth is expected to pick up in the fourth quarter, in part driven by inventory accumulation.

Consumer spending is expected to regain steam for the remainder of the year. Infections are trending down, which is already leading to a rise in demand for travel and other high-contact services.

Personal income gained 0.1% in August after rising 1.1% in July. An increase in Child Tax Credit payments from the government was offset by decreases in unemployment insurance checks related to the pandemic.

Wages continued to rise as companies compete for scarce workers, increasing 0.5% in August. Income at the disposal of households after accounting for inflation edged up 0.1%.

The saving rate fell to a still-high 9.4% from 10.1% in July.

"Households still have plenty left in the tank given rising employment and wages, soaring net worth and massive excess savings," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "However, rising prices are eating into spending power, compounding the ongoing lack of supply."

(Reporting by Lucia MutikaniEditing by Chizu Nomiyama)

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