Although Americans spent more money on goods and services in July than they had in the previous six months, predictions that the Federal Reserve would leave interest rates steady next month were solidified by monthly inflation rates that were declining.
The likelihood of a recession this year was further reduced by the report from the Commerce Department on Thursday and further statistics showing an unexpected drop in first-time unemployment benefit applications last week.
Families are using up extra money they accrued during the COVID-19 outbreak. Millions of Americans will start making student loan payments again in October, and increasing borrowing prices may make it more difficult for consumers to continue using credit cards as a form of payment.
According to Jennifer Lee, a senior economist at BMO Capital Markets in Toronto, “Americans keep spending.” The idea of a “soft landing” is still valid, but warning signs are emerging from consumers as the savings rate declines.
More than two-thirds of American economic activity is comprised of consumer expenditure, which rose 0.8% last month. Spending increased by 0.6% rather than the previously reported 0.5% in June, according to data that was slightly revised higher. The rise in spending was predicted by economists to be 0.7%.
The increase in spending on goods last month was primarily driven by commodities with a limited shelf life, such as food, clothing, recreational goods, and pharmaceuticals. Increases in spending were also seen on autos, recreational equipment, household equipment, and other durable products.
Spending on services climbed by 0.8%, driven by services related to housing and utilities, restaurants, healthcare, and portfolio management and investment advice. Spending on entertainment services increased somewhat over the summer despite the buzz surrounding movie releases like Barbie and Oppenheimer as well as performances by musicians like Taylor Swift.
Veronica Clark, an economist at Citigroup in New York, stated that this “could suggest upside risks for services consumption in August.”
Consumer spending climbed by 0.6% after accounting for inflation, which is the highest increase since January. In June, the so-called real consumer spending increased by 0.4%. Economic analysts revised up their predictions for the gross domestic product as a result of last month’s significant gain, which started real consumer spending on a faster growth path at the beginning of the third quarter.
JPMorgan increased its projected GDP growth for the July-September quarter from 2.5% to 3.5% annualised. In the second quarter, the economy expanded at a pace of 2.1%.
After accounting for inflation, consumer spending increased by 0.6%, the largest gain since January. The so-called actual consumer spending rose by 0.4% in June. Due to the large increase from last month, which put real consumer spending on a quicker growth path at the start of the third quarter, economists revised up their estimates for the gross domestic product.
For the quarter of July through September, JPMorgan raised its predicted GDP growth from 2.5% to 3.5% annualised. The economy grew at a rate of 2.1% in the second quarter.
The personal consumption expenditures (PCE) price index, which measures inflation, increased 0.2% in July, mirroring June’s increase. Energy prices increased 0.1%, while food prices rose by 0.2%. The PCE price index grew 3.3% in the 12 months that ended in July after rising 3.0% in June.
The PCE price index increased by 0.2% when the volatile food and energy components were excluded, following a 0.2% increase in the previous month. After climbing 4.1% in June, the so-called core PCE price index gained 4.2% year over year in July.
A smaller base of comparison from the previous year increased the annual PCE inflation rates. For its 2% inflation target, the Fed keeps an eye on the PCE price indices.
Gregory Daco, chief economist at EY-Parthenon in New York, said: “But make no mistake, the monthly sequential momentum around 0.2% is exactly what Fed policymakers are looking for to get inflation back towards the 2% target.”
The Fed has increased its policy rate by 525 basis points since March 2022, bringing it to the current range of 5.25%-5.50%. According to the FedWatch Tool of the CME Group, financial markets anticipate that the U.S. central bank will maintain its benchmark overnight interest rate during its policy meeting on September 19–20.
According to economists, the price of core services, excluding housing, which are closely monitored by regulators, rose by 0.5% after rising by 0.3% in June. This gave some people hope that the Fed would raise rates in November.
Conrad DeQuadros, senior economic advisor at Brean Capital in New York, stated that “the Fed has to see substantial disinflation in core services before it can consider letting its guard down on inflation.”
Conditions are still tight despite the weakening of the labour market, which saw job openings reach their lowest level in almost 2-1/2 years in July. After having trouble hiring during the COVID-19 pandemic, employers are mainly holding onto their current workforce.
The Labour Department said separately on Thursday that initial claims for state unemployment benefits decreased by 4,000 to a seasonally adjusted 228,000 for the week ended August 26. For the most recent week, 235,000 claims were anticipated by economists.
During the week ending August 19, the number of people getting benefits after the first week of aid—a proxy for hiring—rose 28,000 to 1.725 million.
The August employment report, which is due out on Friday, is unaffected by the claims data.
The number of nonfarm payroll jobs likely grew by 170,000 in August after increasing by 187,000 in July, according to a Reuters survey of experts. Forecasts are for the jobless rate to remain at 3.5%, which is a more than 50-year low.
According to Nancy Vanden Houten, head U.S. economist at Oxford Economics in New York, “signs of looser labour markets are emerging, but the jobless claims data are a reminder that the cooling in labour market conditions is being accompanied by very few layoffs.”