In July, the US consumer spending exhibited growth that aligned perfectly with market expectations, while critical inflation metrics stayed stagnant at the annual level, as reported by government data. According to the Bureau of Economic Analysis, personal consumption expenditures saw an increase of 0.5% last month, a notable rise from 0.3% in June.
This outcome was consistent with the consensus estimate gathered from Bloomberg polls, underscoring the predictability of consumer behavior amidst changing economic conditions. Diving deeper into the spending patterns, the growth rate for goods spending surged to 0.7% in July, recovering from a meager 0.1% the previous month.
This rebound was attributed to a notable increase in durable goods, which returned to positive growth levels. On the other hand, nondurable goods also marked an uptick in spending, advancing from 0.2% to 0.4%. In contrast, services spending showed minimal growth, holding steady at 0.4% month-on-month. Analyzing these developments, Shernette McLeod, an economist at TD Economics, pointed out, 'Consumers seemed to have relied more heavily on savings to keep consumption going in July.' Although the resilience displayed by consumers has been commendable, she cautioned that the ongoing slowdown in the job market, coupled with diminishing savings, would likely test this sustainability moving forward. Turning to inflation, the annual headline Personal Consumption Expenditure (PCE) price index remained unchanged at 2.5%, aligning perfectly with the expectations of the financial markets.
Meanwhile, the Fed's preferred core inflation measure, which excludes volatile food and energy prices, stood at 2.6% for the third consecutive month, slightly below the analysts' consensus forecast of 2.7%. On a sequential basis, inflation exhibited a rise of 0.2% in July after a modest gain of 0.1% in June, while the core measure was stable at 0.2%.
Both inflationary metrics were consistent with what market analysts had predicted, indicating a steadying trend in inflation. Scott Anderson, Chief US Economist at BMO, commented on the implications of this personal income and spending report, stating that it was precisely the kind of data the Federal Reserve needed to bolster its confidence in initiating interest rate reductions.
He mentioned that 'tame headline and core price readings, along with a slowdown in real disposable income growth, should keep inflation and consumer spending in check, even as the Fed moves towards reducing its monetary restrictions.' In a related sentiment, last week, Federal Reserve Chairman Jerome Powell indicated that 'the time has come for policy to adjust,' noting a reduction in upside risks to inflation.
Current projections suggest that there is approximately a 70% probability that the Fed will lower its benchmark lending rate by 25 basis points in the upcoming month, whereas the likelihood of a more significant reduction of 50 basis points stands at around 30%, as per the analysis provided by the CME FedWatch tool..