Summer Spending Surge Shows Consumers Driving Economic Growth Fed likely to leave rates unchanged in September as price pressures ease
Household spending, the primary driver of economic growth, rose a robust 0.8% in July, the Commerce Department said Thursday, up from an upwardly revised 0.6% increase in June and the fastest rate since January. Americans spent more on groceries, recreational goods and vehicles, and on services such as housing, dining out and insurance. Adjusted for inflation, consumer spending rose 0.6% in July.
The Fed’s preferred gauge of consumer prices, the personal-consumption expenditures price index, rose 0.2% in July from a month earlier, the same pace as in June. So-called core prices, which exclude volatile food and energy categories, rose at the same rate.
Inflation ran at a 2.1% annualized rate over the three months through July, close to the Fed’s 2% target. Core prices rose at a 2.9% annualized rate over the previous three months, the lowest such reading since January 2021. (…)
The inflation figures support the case for an extended pause in interest rates, Federal Reserve Bank of Atlanta President Raphael Bostic said in a speech Thursday in South Africa.
Excluding housing costs, which have eased but flow through to official inflation gauges with a lag, 12-month core inflation using the consumer-price index was 2.6% in July, Bostic said. “Given the lagging nature of rental prices in the calculation of [official inflation gauges], underlying inflation may well be close to our target already,” he said.
Robust spending is causing economists to raise their projections for third-quarter economic growth. An Atlanta Fed forecast Thursday estimated gross domestic product will expand at a 5.6% annual rate for the July to September period. A separate forecast by S&P Global Market Intelligence estimated a 3.8% growth rate in the third quarter after the release of Thursday’s data.
Both estimates would be far more rapid than the second quarter’s 2.1% rate. (…)
Consumer spending on services—including doctor visits, hair cuts and dining out—rose more quickly in July, for the second straight month.
Americans opened their wallets more for travel, as well as the “Barbie” film, Beyoncé’s “Renaissance Tour,” and Taylor Swift’s “Eras Tour.”
The number of Uber rides in the U.S. and Canada surpassed prepandemic levels for the first time this spring, and demand for meal delivery stayed strong despite restaurant reopenings. The company projected bookings would grow further this summer.
Walmart, the nation’s largest retailer by revenue, recently said the outlook for consumer spending has brightened since the start of the year, amid low unemployment and solid wage growth. It raised its full-year financial outlook. (…)
The personal saving rate, a measure of how much money people have left each month after spending and taxes, dropped to 3.5% in July, the lowest since last November. Adjusted for inflation, households’ income after taxes declined 0.2% in July another sign Americans could struggle to maintain their current pace of spending. (…)
We knew that goods demand was strong after the retail sales report 2 weeks ago. But +0.9% MoM after +0.7% in June! That’s a 10% annualized rate!
Even including May’s -0.1%, we are at +6.1% a.r. in the last 3 months. Durables? +9.5% a.r. in the last 3 months. These are in real terms, not nominal dollars.
Mind you, goods were deflating again in July, -0.3% MoM after -0.1% in each of May and June. Durables prices dropped 0.7% in July after -0.3% in June.
Booming demand, yet declining prices. Or is it deflated prices triggering demand for bargains?
The FOMC won’t find any signs of waning demand so far, even after boosting rates 525bps. A case in point from Axios:
Data: U.S. Bureau of Economic Analysis, FactSet. Chart: Axios Visuals
And real spending on services did not make way; they were up 0.4% after +0.3% in June, +4.3% annualized in 2 months, even with prices up by identical percentages.
All this spending while real disposable income declined 0.2% after being unchanged in July.
So, savings got pulled: the savings rate dropped from 4.3% to 3.5%.
But the fact remains that Americans roughly spend what they earn: consumption expenditures are up 6.4% YoY in July with labor income up 5.7%. Last 3 months average: expenditures +6.0%, labor income +6.1%.
The income side of the PCE release shows wages and salaries up 0.4% MoM in July, after +0.6% and +0.5% in the two previous months respectively. That’s 6.1% a.r. in the last 3 months, up from +4.0% in the previous 3 months.
Meanwhile, annualized PCE inflation slowed from +2.8% to +2.0%.
And “market-based” PCE inflation, which excludes most imputed prices, stood at +0.1% in each of the last 3 months, +1.2% a.r., after +2.9% in the previous 3 months.
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But Will the Good Times Last? (Wells Fargo)
(…) these new data still leave us questioning is this resilience or madness on behalf of the consumer? (…)
The strong start to the third quarter following an already solid gain in June that was revised higher (+0.4%) sets up third quarter real personal consumption expenditures (PCE) to be quite strong. If growth was flat in the remaining two months of the quarter, real PCE would rise at a 3.6% annualized rate. Even with some moderation in August/September, at this point we expect spending to rise at around a 3% annualized clip. (…)
We estimate households now have about $360 billion in excess savings remaining, which based on the rate at which households have spent this down over the past six months, suggests this source of spending capacity will be tapped by year-end. (…)
While the pandemic-induced downturn was not a balance sheet one for households, consumers will grow more financially vulnerable as excess liquidity runs dry and credit becomes more difficult to obtain and afford. (…)
The jump in spending and still-elevated rates of inflation keep the heat turned up on the Fed. But we look for growth to slow more meaningfully in the remaining months of the year. Household liquidity is draining and debt dynamics are growing less favorable. The most important source of purchasing power—income—is showing some initial signs of softening, and as demand for labor eases, wage growth should follow.
(…) The problem is savings are finite and the banks are tightening lending standards significantly. Credit card borrowing costs are the highest since records began in 1972 so there is going to be a lot of pain out there. (…)
At the current run-rate [excess savings] will all be gone by the end of the second quarter of 2024 and for low and middle incomes that point will come far sooner. With banks far more reluctant to provide unsecured consumer credit, based on the Federal Reserve’s Senior Loan Officer Opinion survey, the clear threat is that many struggling households may soon find their credit cards are being maxed out and they can’t obtain more credit. With student loan repayments restarting, we expect consumer spending to slow meaningfully from late fourth quarter onwards and turn negative in early 2024.
Looks like an easy call given the 3.5% savings rate, unsustainable given history.
But if the savings rate does not rise (it is still above June 2022’s 2.7%), disposable income rising 7.2% YoY like in July could well sustain expenditures in the +5-7% range which, if inflation holds below 3%, would keep real spending up 2-4%.
Would that kind of demand keep inflation so low for long?
The Fed’s “super core” inflation, or core services excluding housing, rose 0.46% in July, a 5.6% annual rate (+4.7% YoY from 4.1% in June).
Some consumers are suffering, however, as “CPI-Essentials” (food, energy, rent) is rising well above overall inflation (and gas prices up 7% in August):
- Dollar Stores Flash Warning Signs on Consumer Spending Dollar General, Dollar Tree say shoppers are shifting spending toward food, essentials
Dollar General reported slowing sales in the recently ended quarter and said its inventory of unsold goods is piling up. The Goodlettsville, Tenn., company said it plans to burn through profit in the second half of the year to reduce inventory and improve performance at its stores. Like other retailers, Dollar General also said it expects store theft to keep rising.
“Our core customers continue to tell us they feel financially constrained,” Chief Executive Jeff Owen said. “Her savings are gone, and so certainly she is still living with the inflationary pressures.”
The chain has been trying to avoid passing along higher prices to its customers and has even reduced prices in some areas, Owen said.
Sales in May held strong, he said, before deteriorating through the summer as shoppers focused on necessities. Heading into the holiday season and the second half of the year, Owen said Dollar General plans to whittle down its inventory through markdowns. (…)
Other discount retailers have issued dour outlooks for the remainder of the year as higher prices and rising interest rates weigh on consumers’ appetite for discretionary spending. Retailers, especially those that cater to middle- and lower-income customers, have also cited reductions in government food-assistance benefits and lower tax refunds as sources of pressure.
Both Dollar General and rival Dollar Tree have said their customers are pulling back on discretionary purchases while spending more on food and essentials, which are less profitable. The companies are also grappling with higher labor costs.
Five Below, a value retailer catering to teens and tweens, earlier this week also cut its full-year profit outlook, citing challenges with shrink, an industry term that refers to goods lost to damages and theft. Executives, though, said demand is holding up as more shoppers hunt for deals. (…)
Off-price apparel retailer Ross Stores earlier this month issued an upbeat outlook for the rest of the year and said customers are still spending on clothes, but looking for value. (…)
Ollie’s Bargain Outlet, which offers steep discounts on products that it buys from overstocked stores or others that are going out of business, raised its full-year sales and profit outlook on Thursday. The company is benefiting as other retailers look to reduce their inventories amid the pullback in spending. (…)
In today’s WSJ:
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Dockworkers Ratify Labor Deal at West Coast Ports The agreement ends a period of uncertainty during drawn-out negotiations that triggered shifts in some U.S. supply chains.
(…) A spokesman for the ILWU declined to disclose the contract’s terms or to comment on the vote. People familiar with the agreement have previously said that it included a 32% pay increase through 2028 and a one-time “hero bonus” for dockworkers who worked through the pandemic. (…)
What to Know About Covid This Fall Covid-19 cases are up due to a summer bump. The latest on new variants, vaccines and testing.
Covid-19 cases, hospitalizations and deaths are up because of a summer bump that doctors note started from very low rates.
Still, there’s concern where Covid infections will go due to an expected increase in the fall and winter months when respiratory viruses typically peak and a new highly mutated variant that is surfacing.
The variants responsible for the small summer wave are all XBB variants, such as EG.5 unofficially named Eris. These variants are descendants of Omicron and the good news is scientists anticipate that the booster expected to roll out next month will be a good match for the XBB variants.
The bad news is there’s another variant—BA.2.96, dubbed “pirola” on social media—that has more than 30 mutations, making it very different from the Omicron descendants. If this variant proliferates, scientists say it likely won’t be a good match to the new booster and will be able to better evade immunity from both vaccines and natural infection. (…)