Current pace unlikely sustainable

U.S. consumer spending is surging, increasing by the most in six months in July, as Americans bought more goods and services, according to America’s Commerce Department in its latest report yesterday.

Together with other data showing an unexpected decline in first-time applications for unemployment benefits last week, this has further diminished the risks of a recession this year. The current pace of increase in consumer spending is, however, unlikely sustainable. 

Households are drawing down excess savings accumulated during the COVID-19 pandemic. On the flip side, student debt repayments resume in October for millions of Americans and higher borrowing costs could make it harder for consumers to keep using credit cards to fund purchases.

Monthly inflation slowing

The slowing monthly inflation rates cemented expectations that the Federal Reserve would keep interest rates unchanged next month. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.8% last month. 

Spending on goods increased 0.7% last month mostly reflecting products with a short life span, including pharmaceuticals, recreational items, groceries and clothing. There were also increases in outlays on recreational goods and vehicles as well as household furnishings and equipment and other long-lasting goods.

Services spending increased 0.8%, driven by portfolio management and investment advice services, housing and utilities, restaurants and healthcare. Despite the hype about movie releases, including Barbie and Oppenheimer, as well as concerts by artists like Taylor Swift, boosting spending over the summer, spending on recreation services rose marginally.

When adjusted for inflation, consumer spending increased 0.6%, also the largest gain since January. The so-called real consumer spending rose 0.4% in June. 

Last month’s solid increase puts real consumer spending on a higher growth path at the start of the third quarter, prompting economists to raise their gross domestic product estimates. With the saving rate dropping to 3.5% last month, the lowest since November 2022, the outlook for consumer spending is less robust. 

The saving rate was at 4.3% in June. Some of the drop in July was attributed to higher taxes, which left income at the disposal of households after accounting for inflation declining 0.2% last month.