Data hints at consumer caution and slowdown in auto purchases and other big-ticket items
The U.S. economy presented mixed signals that could keep the Federal Reserve cautious about hiking interest rates when U.S. consumer spending unexpectedly fell in August 2016 for the first time in seven months, as reported by The Wall Street Journal on Friday, September 30th, 2016. The U.S. Department of Commerce said that consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 0.1% in August 2016 after accounting for inflation, while analysts were expecting a 0.1% gain. Consumer spending grew 0.4% in July 2016. Meanwhile, inflation pressures remained muted amid low prices for gasoline and food.
Reacting to the news, yields on U.S. government debt fell and the dollar weakened against a basket of major currencies, while U.S. stock futures trimmed gains. The fall in consumer spending has casting doubts over prospects of a rate increase at the Fed’s next policy meeting in early November 2016 and roughly even odds of an increase at its mid-December 2016 meeting.
The personal-consumption expenditures price index, the Federal Reserve’s preferred inflation measure, rose only 0.1% from July 2016. From a year earlier, the index was up 1.0%. Core prices, which exclude the volatile categories of food and energy, rose 0.2% from the prior month and were up 1.7% from a year earlier. The Y-o-Y reading was the strongest since February 2016.
Slowdown in auto purchases and big-ticket items
Fed Chairperson Janet Yellen earlier stated that she expected the Fed would raise rates once in 2016 to keep the economy from eventually overheating. Consumer spending, which has been robust in recent months, partially offset the drag from weak business investment and falling inventories in Q2 FY16, when the economy expanded at a lackluster 1.4% annual rate. Consumer spending has been driven by a tightening labor market and possible rise in incomes.
Personal income rose 0.2% in August 2016, in-line with expectations. Consumer prices also rose about as much expected in August 2016, with the price index excluding food and energy increasing 0.2% from the prior month. Inflation, excluding food and energy inched up to 1.7% in the 12 months through August, up a tenth of a percentage point from the prior month and closer to the Fed’s 2% inflation target.
The August spending figures hint at consumer restraint and a slowdown in purchases of autos and other big-ticket items. Separate data in early August 2016 showed a deceleration in U.S. auto sales, although monthly sales volumes remained at a historically strong level. On the other hand, the personal saving rate rose to 5.7% in August from 5.6% in July. Purchases of non-durable goods were down 0.2%, while sales of services, which include utilities, rose 0.3% during August 2016.
While overall economic growth could still accelerate in Q3 FY16, even with August’s slight decline in consumer spending, households appear to be spending lesser than in prior months. However, analysts are expecting GDP to expand at the fastest pace so far this year during Q3 FY16, helped by consumers spending during the upcoming holiday season and an upswing in exports. Forecasting firm Macroeconomic Advisers is tracking a 2.9% pace of growth, while the Federal Reserve Bank of Atlanta’s GDPNow forecasted a growth of 2.4%.