News

US Consumer Spending Starts off Strong in Third Quarter

September 1, 2016

US Consumers increased their spending in July thanks to improving job growth, incomes, and lower fuel prices. The boost in expenditures marks a strong start to the third quarter for the US economy after a disappointing performance in the three months ending in June. Both spending and personal incomes were up for the month, while the Personal Consumption Expenditure price index—the US Federal Reserve’s preferred measure of inflation—grew at the same pace as June.

On the whole, a stronger month for consumer spending and incomes echoes Fed Chair Janet Yellen’s—and other Fed officials’—hawkish remarks in recent days and increases the likelihood the Central Bank will raise the benchmark interest rate during the FOMC’s upcoming September meeting, or at least before the year ends. Eyes now turn to this week’s payrolls report and ISM numbers ahead of what is likely to be a speculation-filled month.

Improving Numbers

Consumers in the US continued to spend in July, keeping a four-month streak alive by increasing expenditures starting in April of this year. For the month, personal spending in the US rose by 0.30%, slightly down from June’s upwardly revised 0.50% gain but still in line with the previous two months. Spending was boosted by a variety of factors, the largest of which was another expansion in personal incomes, which have been on an upward trend for five months following a slight contraction back in February.

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The uptick in consumption was driven in large part by increased demand for automobiles and services, which offset the falling demand for non-durable goods. The spending expansion means that consumers continued to purchase goods at the same pace recorded during the second quarter, when a 4.40% annual rate marked the fastest pace of consumption growth in two years.

Gains in incomes also helped establish a stronger backdrop, with consumers counting on greater disposable income for purchases. For July, personal incomes increased by 0.40%, matching consensus estimates and improving slightly over an upwardly revised 0.30% in June. The improving wage situation comes as a likely result of a tightening labor market that has seen unemployment remain at multi-year lows while job creation figures improve and companies continue to add new hires.

Inflation Still Low

Despite the positive numbers in spending and incomes, the Fed might still have pause for concern during the September meeting as inflation remains stubbornly low. The Personal Consumption Expenditures Price Index, the Fed’s preferred gauge of inflation, remained low for another month. PCE remained flat month over month while expanding 0.80% year over year. Core PCE—which strips out volatile food and fuel prices—was also lackluster at 0.10% month over month and 1.60% annualized compared to the Fed’s preferred target of 2.00%.

Outlook

The Fed has maintained recently that the signs are positive and pointing towards an interest rate hike or two before year end. However, the Central Bank remains data-dependent in their decisions and weak PCE numbers might offset a slew of positive indicators that have pointed towards a strengthening US economy, including improving labor statistics, a strengthening housing market, and better overall consumption. Eyes now turn to this week’s payroll numbers, a strong indicator in either direction for the Federal Reserve.

The Dollar rose briefly on the news, but was trending lower a few hours after the report, with the US Dollar index down by 0.03%. Equity markets reacted more positively, however, with the S&P 500 futures climbing 0.59% in early trading followed by a 0.37% gain in Nasdaq Composite and a 0.66% rally in Dow futures.