The Economy

Consumer Spending Growth Slows to 0.3%

Economists had expected a slowdown in August after five straight strong gains but consumer confidence remains high.
Matthew HellerSeptember 28, 2018

The pace of growth in U.S. consumer spending slowed in August but economists had expected a slowdown after five straight strong gains.

The Commerce Department reported Friday that spending rose 0.3% last month, in line with economists’ expectations and the smallest increase since February.

The report also showed that the Federal Reserve’s measure of underlying inflation remained at its 2% percent target for a fourth straight month, easing concerns that the economy may be overheating and likely keeping the Fed on its path of gradual interest rate hikes.

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“Growth is solid and inflation pressures modest,” Chris Rupkey, chief economist at MUFG in New York, told Reuters. “This is exactly the environment the Fed needs to move interest rates up at a gradual pace as further rate hikes start to look like tightening.”

Spending last month was driven by outlays on healthcare, which offset a drop in motor vehicle purchases. Outlays on durable goods such as new cars fell 0.1%, while spending on services increased 0.3% and purchases of nondurable goods such as gas rose 0.5%.

“On balance, these data indicate a solid but slowing momentum in consumer spending growth in Q3, around 3.5% after a remarkable 3.8% advance in Q2. Our GDP tracker points to growth around 3.3% in Q3,” said Lydia Boussour, senior U.S. economist at Oxford Economics.

The economy grew at a 4.2% rate in the second quarter, fueled by robust consumer spending as well as farmers front-loading soybean exports to China before Beijing’s retaliatory tariffs came into effect in early July.

While economists expect consumer spending to slow in the third quarter, MarketWatch said it “is expected to remain strong with confidence at high levels, taxes cut and income rising.”

On the inflation front, the personal consumption expenditures price index excluding the volatile food and energy components was unchanged. The core PCE, the Fed’s preferred measure, posted a 2% year-on-year increase in August.

“Both overall and core inflation are right near the Federal Reserve’s 2% objective, and show no signs of accelerating,” said Gus Faucher, chief economist at PNC Financial Services Group.