US consumer spending rises solidly in July

Washington

US CONSUMER spending increased more than expected in July, strengthening expectations for a sharp rebound in growth in the third quarter, though momentum is likely to ebb as the Covid-19 pandemic lingers and fiscal stimulus dries up.

The report from the Commerce Department on Friday also showed a rise in personal income after two straight monthly declines, while monthly inflation pushed higher. The Federal Reserve on Thursday rolled out a sweeping rewrite of its mandate, putting new weight on the US labour market and less on worries about too-high inflation.

Consumer spending rose 1.9 per cent last month, after jumping 6.2 per cent in June. Economists polled by Reuters had forecast consumer spending gaining 1.5 per cent in July. Consumers boosted spending on goods like new motor vehicles.

Spending on goods has rebounded above pre-pandemic levels. They also lifted spending on healthcare, dining out and on hotel and motel accommodation. Still, outlays on services are below February levels as consumers remain wary of exposure to the virus. That is a bad omen for the services-based economy, which slipped into recession in February. Though new Covid-19 infections have subsided after a broad resurgence through the summer, many hot spots remain.

The economy suffered its deepest contraction in at least 73 years in the second quarter, with consumer spending at the forefront of the decline in GDP.

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While economists are anticipating a sharp rebound in GDP in Q3, led by consumer spending, they are cutting estimates for the fourth quarter.

Prospects for Q3 GDP growth were boosted by another report from the Commerce Department on Friday showing a rebound in retail inventories in July. That could offset a potential drag from rising imports, which led to a widening in the goods trade deficit last month.

Last month, income rose 0.4 per cent amid an increase in wages as more businesses reopened, offsetting a decrease in government transfer payments.

Income fell one per cent in June. Wages gained 1.3 per cent after increasing 2.2 per cent in June.

With spending heavily tilted towards goods, monthly inflation increased further in July. The personal consumption expenditures (PCE) price index rose 0.3 per cent after surging 0.5 per cent in June. In the 12 months through July the PCE price index increased one per cent after gaining 0.9 per cent in June. REUTERS