US consumer spending down unexpectedly in July

Friday 29 August 2014 14.15
Economists had expected consumer spending to rise slightly during the month
Economists had expected consumer spending to rise slightly during the month

US consumer spending unexpectedly fell in July as savings rose to their highest level in more than 1-1/2 years, indicating that households remain cautious despite an acceleration in economic growth.

The country’s Commerce Department said consumer spending dipped 0.1% last month, the first decline since January, after an unrevised 0.4% gain in June.

Economists had expected consumer spending, which accounts for more than two-thirds of US economic activity, to increase 0.2% in July. 

When adjusted for inflation, it slipped 0.2% after gaining 0.2% in June.

The weakness in consumer spending at the start of the third quarter will probably do little to change perceptions that the economy has retained much of its second-quarter momentum.

Other sectors of the economy such as housing, business spending, exports and government activity are accelerating. In addition, labour market conditions are strengthening.

The government reported yesterday that the economy expanded at a 4.2% annual pace in the second quarter, with consumer spending growing at a 2.5% pace.

Third-quarter growth estimates currently range as high as a 3.6% rate.

Savings increased to $739.1bn in July, the highest level since December 2012, from $709.4bn in June. 

At 5.7%, the saving rate was also the highest since December 2012. The increase in savings came even as income posted its smallest increase since December.

While rising savings bode well for future spending, confidence among households will probably need to increase significantly for spending to pick up.

With consumption weak, inflation pressures were muted in July, giving the Federal Reserve room to keep its benchmark overnight lending rate near zero for some time while it awaits an acceleration in wage growth.

A price index for consumer spending edged up 0.1% after increasing 0.2% in June. 

That was the smallest rise since February. In the 12 months through July, the personal consumption expenditures price index rose 1.6%. It also increased by 1.6% in June.

Excluding food and energy, prices inched up 0.1% after rising by the same margin in June.

The so-called core PCE, which is the Fed's favourite inflation measure, increased 1.5% in the 12 months through July, continuing to run below the US central bank's 2% target. It had advanced 1.5% in June.

Last month, income increased 0.2% after rising 0.5% in June. Income at the disposal of households after adjusting for inflation and taxes nudged up 0.1% after increasing 0.3% in June.