US consumer spending increases, inflation eroding buying power

US consumer spending surged in August, but outlays adjusted for inflation were weaker than initially thought in the prior month, reinforcing expectations that economic growth slowed in the third quarter as Covid-19 infections flared up.

The report from the Commerce Department on Friday, which showed inflation remaining hot in August, raised the risk of consumer spending stalling in the third quarter, even if spending accelerates further in September. Inflation-adjusted, or the so-called real consumer spending is what goes into the calculation of gross domestic product.

“Third quarter consumer spending is on track for only a scant gain,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina. “If Covid cases keep falling and sentiment turns positive, there is scope for a more solid finish to this tumultuous year.”

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

Consumption was boosted by a 1.2 per cent rise in purchases of goods, reflecting increases in spending on food and household supplies as well as recreational items, which offset a drop in motor vehicle outlays. A global shortage of semiconductors is undercutting the production of automobiles.

Goods spending fell 2.1 per cent in July. Spending on services rose 0.6 per cent in August, supported by housing, utilities and health care. Services, which account for the bulk of consumer spending, increased 1.1 per cent in July. Spending is shifting back to services from goods, but the resurgence in coronavirus cases, driven by the Delta variant, crimped demand for air travel, hotel accommodation and sales at restaurants and bars.

Slowing growth

High inflation is cutting into spending. Real consumer spending rose 0.4% in August following a downwardly revised 0.5% drop in July. With the August and July data in hand, economists predicted that growth in consumer spending would probably brake to around a 1% annualized rate in the third quarter.

Consumer spending grew at a robust 12.0% rate in the April-June quarter, accounting for much of the economy’s 6.7% growth pace. The level of GDP is now above its peak in the fourth quarter of 2019.

The Atlanta Fed cut its GDP estimate for the quarter to a 2.3% rate from a 3.2% pace. Slower growth was reinforced by a third report from the Commerce Department showing construction spending flat in August. 

“Even with the softening growth picture, we continue to expect the Fed to announce the start of tapering at the early November meeting,” said Michael Feroli, chief U.S. economist at JPMorgan in New York.