Consumer Spending Gain Shows U.S. Is Weathering Global Slowdown

  • Purchases climbed a more-than-forecast 0.4 percent in August
  • Wages increased annualized 5 percent, the most since January

Household spending climbed more than forecast in August and the prior month was revised up, fueled by wage growth and indicating consumers will help the U.S. economy muddle through a global slowdown.

The 0.4 percent increase in purchases matched the July advance that was larger than previously reported, Commerce Department figures showed Monday. The median forecast of economists in a Bloomberg survey called for a 0.3 percent August increase. Employment gains helped wages climb an annualized 5 percent over the last three months, the most since January.

Consumers’ willingness to spend puts the U.S. into a better position to navigate international risks that threaten to weigh on growth. Solid gains in the labor market, combined with falling gasoline prices and growing incomes, should continue to propel the consumption that accounts for 70 percent of the economy.

“Today’s number is consistent with a 3 percent consumer spending profile for the third quarter,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York and the best forecaster of household outlays over the past two years, according to data compiled by Bloomberg. “It’s a very nice pace, to be sure.”

Wages in August climbed 0.5 percent after a 0.6 percent jump a month earlier, the strongest back-to-back gains this year. The gain in worker pay helped incomes rise 0.3 percent after a 0.5 percent increase in July.

Projections for spending ranged from gains of 0.2 percent to 0.5 percent, after a previously reported July increase of 0.3 percent. The Bloomberg survey median called for incomes to rise 0.4 percent after the biggest advance since November.

Real Spending

Adjusting for changes in prices, spending rose 0.4 percent, the most in three months. Real outlays for durable goods, including motor vehicles, rose 1.2 percent after a 1.3 percent increase a month earlier. Spending on non-durable goods and services rose more in August than in July.

Another report on Monday showed the housing market took a breather in August. Contract signings to purchase previously owned U.S. homes unexpectedly declined in August for just the second time this year, signaling residential real estate might have difficulty building on recent momentum. The National Association of Realtors said its index of pending home sales decreased 1.4 percent after a 0.5 percent advance in July.

Below Goal

The Commerce Department’s figures showed the price index tied to consumer spending was unchanged in August. From a year earlier, the gauge was up 0.3 percent. This inflation measure is preferred by Federal Reserve policy makers.

Stripping out the volatile food and energy components, the price measure rose 0.1 percent from the month before and 1.3 percent in the 12 months ended August.

Inflation has stayed stubbornly below the central bank’s 2 percent target since 2012, which makes it harder for the Fed to justify tighter policy. The Federal Open Market Committee decided Sept. 17 not to hike rates, citing worries over the slowdown in China and other international concerns.

Fed’s Dudley

“I think that the economy is doing pretty well,” Federal Reserve Bank of New York President William Dudley said at an event Monday in New York, noting that the central bank will “probably” raise interest rates before year-end.

Dudley said his expectation on timing was "not calendar guidance. It depends on the data. That’s based on my view of how the economy is likely to evolve.” His remarks are aligned with the views of Fed Chair Janet Yellen, who said Sept. 24 she also felt it likely the Fed would boost borrowing costs this year for the first time in almost a decade.

A resilient labor market is encouraging Americans to spend. Employers have added an average 212,000 workers to payrolls each month this year, more than enough to keep reducing slack in the labor market, economists have said.

Because spending rose more than incomes, the personal saving rate eased to 4.6 percent in August from 4.7 percent a month earlier.

Consumer Sentiment

Even with the global threats, consumers remain optimistic about the domestic economy, according to the University of Michigan’s survey. While international developments have lowered confidence levels, the data are still indicative of consumption expanding at a 2.9 percent annualized rate, the group said.

With cheap oil reducing business investment and a stronger dollar crimping factories, households have had to do the heavy lifting for growth this year. Gross domestic product rose at a 3.9 percent rate in the second quarter, boosted by stronger consumer spending and construction.

The biggest obstacle for the economy in the current quarter is the need to reduce bloated inventories, which has economists projecting slower growth. GDP is forecast to expand at a 2.4 percent rate, according to the median forecast of economists surveyed by Bloomberg from Sept. 4 to Sept. 9.

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