Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

U.S. consumer spending increases; inflation eroding households' buying power

Economic IndicatorsOct 01, 2021 01:11PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: People wearing protective masks shop at Macy's Herald Square following the outbreak of the coronavirus disease (COVID-19) in the Manhattan borough of New York City, New York, U.S., December 26, 2020. REUTERS/Jeenah Moon

By Lucia Mutikani

WASHINGTON(Reuters) - U.S. 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 (NYSE:WFC) 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 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 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% in July. Spending on services rose 0.6% in August, supported by housing, utilities and health care. Services, which account for the bulk of consumer spending, increased 1.1% 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.

Economists polled by Reuters had forecast consumer spending increasing 0.6% in August.

Inflation maintained its upward trend in August, though price pressures have probably peaked. 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 U.S. central bank last week upgraded its core PCE inflation projection for this year to 3.7% from 3.0% back in June.

The Fed said it would likely begin reducing its monthly bond purchases as soon as November and signaled interest rate increases may follow more quickly than expected. Fed Chair Jerome Powell, who has maintained that high inflation is transitory, told lawmakers on Thursday that he anticipated some relief in the months ahead.

Still, inflation could remain high for a while. A survey from the Institute for Supply Management on Friday showed manufacturers experienced longer delays getting raw materials delivered to factories and paid higher prices for inputs in September.

Stocks on Wall Street were higher. The dollar fell against a basket of currencies. U.S. Treasury prices were mixed.

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 (NYSE:JPM) in New York.

The economy remains supported by record corporate profits. Households accumulated at least $2.5 trillion in excess savings during the pandemic. Coronavirus infections are trending down, which is already leading to a rise in demand for travel and other high-contact services. Businesses need to replenish depleted inventories, which will keep factories humming.

A fourth report from the University of Michigan showed consumer sentiment ticked higher for the first time in three months in September. But a survey from the Conference Board this week showed consumer confidence dropping to a seven-month low in September.

Though personal income gained only 0.2% in August after rising 1.1% in July as an increase in Child Tax Credit payments from the government was offset by decreases in unemployment insurance checks related to the pandemic, wages are rising as companies compete for scarce workers. Wages rose 0.5% in August, which should help to keep spending supported.

With inflation high, real disposable income dropped 0.3% after increasing 0.7% in July. 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."

U.S. consumer spending increases; inflation eroding households' buying power
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (10)
Sol Weinberg
Sol Weinberg Oct 02, 2021 6:21AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
With 2/3 of the US economy based on consumer spending and consumption its no wonder why we will never have a meaningful recovery from any downturn.  Real economic growth come from saving and production, not spending and borrowing. Its only a matter of time before this house of cards comes tumbling down, and I think COVID accelerated that outcome.
William Bailey
William Bailey Oct 01, 2021 2:03PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Buying less for more isnt progress
James Pattison
James Pattison Oct 01, 2021 1:34PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Inflation errodes consumer purchasing power… thats news?? Umm ok
Casador Del Oso
Casador Del Oso Oct 01, 2021 12:40PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thanks Joe
John Klan
John Klan Oct 01, 2021 9:15AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thank Biden for 80 dollar a barrel oil. What an oaf.
Kaveh Sun
Kaveh Sun Oct 01, 2021 9:13AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Inflation is high while working employees r barely get any raise to match that. Biden is r o b bing the working class to pay the non working b u m ps.
William Bailey
William Bailey Oct 01, 2021 9:04AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Gahaha… inflation accounts for increased consumer spemdimg—- as usual , sleight of hand!! Scammers
Cletus Nolex
Cletus Nolex Oct 01, 2021 9:04AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I have one stock
Charles Sturrock
Charles Sturrock Oct 01, 2021 9:01AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Consumer spending up? Sure it is, but it is not as presented. Consumers spent more, not because they were buying more, yet they were paying more for the same things. See how this works? This is a fleecing of the lower and middle classes. If you won't spend your money, and load up those credit cards to the max, then the system will beat you into submission through inflation. The power brokers cannot make you buy more things, but they sure as ****can make you spend more. Sure, your wealth appears to have improved on paper, rising home and other asset values, but the value of those dollars is being eroded rapidly, so we're treading water at best.
John Klan
John Klan Oct 01, 2021 9:01AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
and even with rising home values it really means nothing because you couldn't go out and buy an equivalent home for any less so that's a zero sum gain.
Josh Davis
Josh Davis Oct 01, 2021 9:01AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
John Klan both of yiu nailed it
Pratt Man
Pratt Man Oct 01, 2021 8:56AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Remember, inflation was negative during the pandemic, so we have some catching up to do.
Pratt Man
Pratt Man Oct 01, 2021 8:56AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The economy is sizzling and profits will be off the charts in 2022.
William Bailey
William Bailey Oct 01, 2021 8:56AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Sizzling like a burnt Thanksgiving turkey …. Markets are doomed without the free ctedit cash printed by the Fed and shoveled to corporations
Josh Davis
Josh Davis Oct 01, 2021 8:56AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
William Bailey if he knew economics he would know thats the cantillon effect you just described.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email