U.S. Consumer Spending Starts Q3 on a Softer Footing

Aug 26 26, 13:42 GMT

Personal income advanced by 0.4% month-over-month (m/m) in July, slightly ahead of market expectations for 0.2% gain. After adjusting for inflation, taxes, and transfers, real disposable personal income was also up by 0.4% m/m.
Consumer spending rose modestly, edging up by 0.2% m/m in nominal terms. After adjusting for inflation, spending was flat on the month.
Across the broad categories, real spending on goods weakened, falling by 0.6% and reversing June’s gain. Durable goods—particularly motor vehicles and parts, and recreational goods and vehicles—led the decline. Inflation-adjusted spending on services fared better, advancing by 0.3%, with gains in transportation services (+0.6%), healthcare (+0.4% m/m), and food services and accommodation (+0.4% m/m).
With income outpacing spending, the personal saving rate rose to 3% in July from 2.6% in the prior month, marking its first monthly increase since January.
Turning to inflation, core PCE—the Fed’s preferred inflation gauge—rose 0.2% m/m in July, up from the 0.1% m/m gain the month prior. The twelve-month change core PCE inflation remained unchanged at 3.3%.

Key Implications

July may have been the hottest month on record in the United States, but the temperature on consumer spending was turned down. That said, spending over the last three-months is still running at healthy 3.3% (annualized) pace. The softer reading was not entirely unexpected, as weakness in goods spending had already been signaled by last month’s retail sales report. As we noted previously, some of the softening last month looks to reflect a shift in the timing of Amazon Prime Day. More broadly, the moderation follows a weather- and tax-refund-fueled rebound in second-quarter spending. All in all, despite the somewhat slower start to the third quarter, today’s release is still consistent with consumption expanding at a 2.5% annualized pace this quarter, broadly in line with our forecast.
Encouragingly, the household savings rate ticked higher last month, reflecting both the softer read on spending, and some firming in personal income growth – a reversal of the recent trend. Looking ahead, we expect to see this trend continue as consumer spending moderates a touch while income growth normalizes alongside easing inflationary pressures.