August 30, 2019 / 12:48 PM / 14 days ago

Strong consumer spending propping up U.S. economy

(Corrects this August 30 story to fix photo caption error. No change to headline or text.)

FILE PHOTO: People shop at a UNIQLO store during the grand opening of the The Hudson Yards development, a residential, commercial, and retail space on Manhattan's West side in New York City, New York, U.S., March 15, 2019. REUTERS/Brendan McDermid/File photo

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer spending increased solidly in July as households bought a range of goods and services, which could further allay financial market fears of a recession, but the strong pace of consumption is unlikely to be sustained amid tepid income gains.

The report from the Commerce Department on Friday added to July trade and inventory data in suggesting that while the economy was slowing, it was not losing altitude rapidly for now. But risks to the longest economic expansion in history are mounting, mostly from a year-long trade war between the United States and China.

The trade fight between the two economic giants has spooked financial markets and caused an inversion of the U.S. yield curve, which has stoked fears that the economic expansion now in its 11th year is in danger of being derailed by a recession.

“Even with elevated policy uncertainty and financial market turbulence, the U.S. consumer continues to display great vitality, emboldened by a large savings buffer,” said Lydia Boussour, senior U.S. economist at Oxford Economics in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6% last month after an unrevised 0.3% gain in June, the government said.

Economists polled by Reuters had forecast consumer spending advancing 0.5% last month. Consumer spending is being driven by a strong labor market, which is marked by the lowest unemployment rate in nearly 50 years, and better job security.

But with Washington due to slap additional tariffs on Chinese goods on Sept. 1 and in December, there are concerns that consumer spending could take a hit.

A survey from the University of Michigan on Friday showed its consumer sentiment index in August dropping by the most since December 2012, amid nervousness about the trade tensions.

Earlier this week, a survey from the Conference Board, which focuses heavily on the labor market, showed a mild drop in consumer sentiment in August. The stock market has a bigger weighting in the University of Michigan consumer sentiment survey.

“The link between sentiment and spending is not especially tight, but the recent decline in consumer sentiment could be a sign that the spending data will soften soon,” said Daniel Silver, an economist at JPMorgan in New York.

The U.S.-China trade conflict has weighed heavily on manufacturing and business investment, which contracted in the second quarter. That, together with slowing global growth as well as persistently low domestic inflation, will likely see the Federal Reserve cutting interest rates again next month.

Fed Chairman Jerome Powell said last week that the economy was in a “favorable place,” but reiterated that the U.S. central bank would “act as appropriate” to keep the economic expansion on track. The Fed lowered its short-term interest rate by 25 basis points last month for the first time since 2008, citing trade tensions and slowing global growth.

The dollar firmed against a basket of currencies, while U.S. Treasury prices fell. Stocks on Wall Street were trading higher.

LOW INFLATION

Consumer prices as measured by the personal consumption expenditures (PCE) price index rose 0.2% in July as a drop in the cost of food was offset by a surge in energy goods and services. The PCE price index edged up 0.1% in June.

In the 12 months through July, the PCE price index increased 1.4% after gaining 1.3% in June.

Excluding the volatile food and energy components, the PCE price index rose 0.2% last month, matching June’s increase. That kept the annual increase in the so-called core PCE price index at 1.6% in July.

The core PCE index is the Fed’s preferred inflation measure and has undershot the U.S. central bank’s 2% target this year.

“While the shorter-term trend in core prices has picked up, the low yearly rate, along with the recent escalation in trade protectionism, can only spur the Fed to pull the easing trigger again on Sept. 18,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

When adjusted for inflation, consumer spending increased 0.4% in July. This so-called real consumer spending rose 0.2% in June. Last month’s jump in core consumer spending suggested consumption remained strong early in the third quarter after it surged at its fastest pace in 4-1/2 years in the second quarter.

The economy grew at a 2.0% annualized rate in the second quarter, slowing from the January-March quarter’s brisk 3.1% pace. Growth estimates for the third quarter range from a 1.5% rate to a 2.3% pace.

The economy is largely losing speed as the stimulus from the White House’s $1.5 trillion tax-cut package and a government spending blitz fades.

Last month, spending on goods surged 0.9%, driven by outlays on recreational goods and motor vehicles. Spending on services increased 0.5%. Consumer spending in July was supported by savings as personal income edged up 0.1%, the smallest rise since last September. That followed a 0.5% increase in June.

Wages increased 0.2% and personal interest income fell 1.8%. Savings fell to $1.27 trillion, the lowest level since November 2018, from $1.32 trillion in June.

Reporting by Lucia Mutikani; Editing by Andrea Ricci

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