WASHINGTON: US consumer spending barely rose in August and business investment remained weak, suggesting the economy was losing momentum as trade tensions linger.
Still, the reports on Friday from the Commerce Department likely do not signal a recession is looming as consumer spending remains supported by solid income growth, thanks to the lowest unemployment rate in nearly 50 years and massive savings.
“Consumer spending slowed in August as the market turbulence and trade war escalation had shoppers stepping back from the stores and malls and saving more for a rainy day,” said Chris Rupkey, chief economist at MUFG in New York. “The good news is the data today are a gentle reminder that there’s no recession anywhere out there on the horizon.” Consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1 per cent last month as an increase in outlays on recreational goods and motor vehicles was offset by a decrease in spending at restaurants and hotels.
Data for July was revised slightly down to show consumer spending increasing 0.5 per cent instead of the previously reported 0.6 per cent advance. Economists polled by Reuters had forecast consumer spending gaining 0.3 per cent last month.
Consumer spending has been blunting some of the hit on the economy from the White House’s nearly 15-month trade war with China, which has sunk business investment and manufacturing.
But with tariffs on Chinese goods broadened to include consumer goods, there are fears that spending could slow. There are also worries that weak business investment and sluggish profit growth could constrain companies’ ability to continue hiring more workers, and undermine consumer spending.
The Federal Reserve last week cut interest rates for the second time this year, citing the ongoing risks to the longest economic expansion on record from the US-China trade war and slowing global growth.
The US central bank cut rates in July for the first time since 2008. The economy is now in its 11th year of expansion.
In another report on Friday, the Commerce Department said orders for non-defence capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.2 per cent last month amid weak demand for electrical equipment, appliances and components, and computers and electronic products.
Data for July was revised down to show these so-called core capital goods orders unchanged instead of gaining 0.2 per cent as previously reported. Economists had forecast core capital goods orders unchanged in August.
Core capital goods orders increased 1.1 per cent on a year-on-year basis. Shipments of core capital goods rose 0.4 per cent last month.
Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement.
Core capital goods shipments fell by an unrevised 0.6 per cent in July. Business investment declined at its steepest pace in 3-1/2 years in the second quarter. The trade war with China has been blamed for the downturn in business investment.
Powell last week said trade policy tensions, which “have waxed and waned, and elevated uncertainty is weighing on US
investment and exports,” adding that US central bank contacts had told policymakers that trade policy uncertainty “has discouraged them from investing in their businesses.” US financial markets were little moved by the data.
Inflation readings mixed
The economy grew at a 2.0 per cent annualised rate last quarter, slowing from the January-March quarter’s brisk 3.1 per cent pace. The Atlanta Fed is forecasting gross domestic product rising at a 1.9 per cent rate in the third quarter.
The Commerce Department also reported that consumer prices as measured by the personal consumption expenditures (PCE) price index were unchanged in August as food prices declined for a third straight month and the cost of energy goods and services dropped 2.0 per cent.
The PCE price index rose 0.2 per cent in July. In the 12 months through August, the PCE price index increased 1.4 per cent, rising by the same margin for a fourth straight month.
Excluding the volatile food and energy components, the PCE price index edged up 0.1 per cent last month after rising 0.2 per cent in July.
That lifted the annual increase in the so-called core PCE price index to 1.8 per cent in August, the biggest gain since January, from 1.7 per cent in July.
The core PCE index is the Fed’s preferred inflation measure and has undershot the US central bank’s 2 per cent target this year.
When adjusted for inflation, consumer spending gained 0.1 per cent in August. This so-called real consumer spending increased 0.3 per cent in July. Consumer spending surged at a 4.6 per cent annualised rate in the second quarter, the fastest pace in 4-1/2 years.
Last month, spending on goods rose 0.1 per cent, driven by outlays on recreational goods and motor vehicles. Spending on services increased 0.2 per cent.
Personal income rose 0.4 per cent in August after nudging up 0.1 per cent in the prior month. Wages increased 0.6 per cent. With income growth outpacing spending, savings rose to $1.35 trillion from $1.29 trillion in July.