US Consumer Spending Increases Solidly in August

US consumer spending increased slightly more than expected in August, keeping the economy on solid ground as the third quarter progressed, while inflation continued to rise at a measured pace.

Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.6 percent last month after an unrevised 0.5 percent advance in July, the Commerce Department’s Bureau of Economic Analysis said on Friday.

Economists polled by Reuters had forecast consumer spending increasing 0.5 percent after a previously reported 0.5 percent gain in July.

Spending has marched ahead despite a significant labor market slowdown, marked by stall-speed job growth in the last three months. It is being driven by high-income households as a robust stock market and still-elevated home prices boost their wealth. Federal Reserve data this month showed household wealth jumped to a record $176.3 trillion in the second quarter.

But lower-income households are struggling, and bearing a large share of the burden from higher prices on goods from import tariffs. More pain lies ahead when cuts to the federal government’s supplemental nutrition assistance program, commonly known as food stamps, take effect.

“With spending concentrated among high-income households the risk to the consumption growth forecast is more concentrated in the drivers of household wealth – the stock market and house prices,” said Ryan Sweet, chief US economist at Oxford Economics. “Wealth effects have become more potent for consumer spending, a positive when stock and house prices are rising, but a risk if, and when, they sputter.”

Economists Expect Spending Will Slow

Strong consumer spending contributed to gross domestic product growing at a 3.8 percent annualised rate in the second quarter, the fastest in nearly two years. Growth estimates for the third quarter are converging around a 2.5 percent pace.

Economists expect spending to slow considerably by the end of the year, undercut by higher prices. Inflation has been slow to rise in response to President Donald Trump’s sweeping tariffs as businesses sold inventory accumulated before the duties kicked in and even absorbed some of the duties.

The Personal Consumption Expenditures (PCE) Price Index increased 0.3 percent in August after gaining 0.2 percent in July, the BEA said. In the 12 months through August, the PCE Price Index advanced 2.7 percent after climbing 2.6 percent in July.

Excluding the volatile food and energy components, the PCE Price Index rose 0.2 percent last month after increasing 0.2 percent in July. In the 12 months through August, the so-called core inflation increased 2.9 percent after rising 2.9 percent in July.

The Fed tracks the PCE price measures for its 2 percent inflation target. The US central bank last week resumed policy easing, cutting its benchmark overnight interest rate by 25 basis points to the 4.00-4.25 percent range.

Fed Chair Jerome Powell said this week that “near-term risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation.”

By Lucia Mutikan; Editor: Chizu Nomiyama

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