WASHINGTON: US consumer spending slowed sharply in August, according to the latest government data Friday, suggesting turmoil from President Donald Trump’s trade wars was hitting home for the general public. And in another sign trade tribulations are weighing on American industry, demand for big-ticket manufactured goods also showed unwelcome weakness, economists said.
The new data Friday caused some economic forecasters to cut their third-quarter GDP growth estimates sharply, and they also were likely to exacerbate disagreements among US central bankers over the path of interest rates. Federal Reserve policymakers are increasingly divided over the direction of monetary policy but markets expect they will vote to cut the benchmark lending rate again this year to cushion the trade war’s impact on the economy.
But the data also showed underlying inflation perking up by the most in seven months on an annual basis in August, which economists said could put the Federal Reserve in a difficult position as it seeks to keep the longest economic expansion on record, now in its 11th year, on track. The Fed last week cut interest rates for the second time this year, citing the ongoing risks from the Trump administration’s nearly 15-month trade war with China and slowing global growth. The US central bank lowered borrowing costs in July for the first time since 2008.
“We still expect the Fed will cut rates in the fourth quarter, but squaring this soft read on the consumer, business investment and a slight rebound in underlying inflation admittedly pulls the Fed in opposite directions,” said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. Consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1 percent last month as an increase in outlays on recreational goods and motor vehicles was offset by a decrease in spending at restaurants and hotels.
On one hand, a key component of the Federal Reserve’s preferred inflation measure of ticked higher in August for the third month in a row, although it remains below the Fed’s two percent target, according to Commerce Department data. That could bolster arguments against cutting interest rates again.
But on the other hand the decline in consumer spending and weakness in durable goods orders suggest the world’s largest economy is slowing faster than expected, suggesting easier interest rates are needed to boost it. Ian Shepherdson of Pantheon Macroeconomics said Friday said the trade war made consumers “nervous” and “the consumer boom is coming to an end, rapidly.”
The Commerce Department said disposable incomes adjusted for inflation rose 0.4 percent in August, the biggest increase since February, suggesting consumers have plenty of cash available. But spending slowed to show a tepid 0.1 percent gain, its smallest monthly pace since February. Compared to the same month last year, the increase was the weakest recorded since December 2018.
As a result, savings rose to $1.36 trillion, the highest level since March, meaning American consumers are holding onto their cash. Meanwhile, August appeared at first glance to be a better-than-expected month for US manufacturing, with a second straight sales gain for military aircraft and equipment, according to a Commerce Department report.
Together with a boost in sales of primary metals, overall new orders for big-ticket, US-made items rose 0.2 percent, far better than the one percent drop economists had expected. But the data show other industries had a painful month, with notable declines for civilian aircraft, autos, communications equipment, electronics and appliances. A measure seen as a proxy for business investment, and a sign of future business activity, also fell in August after recording a flat July.
Taking the developments into account, Macroeconomic Advisers slashed their third-quarter GDP forecast by 0.6 percentage point to 1.6 percent-about half what it was at the start of the year. Fed Chair Jerome 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.”
The weak core capital goods data and tepid consumer spending led economists to cut their third-quarter GDP estimates by as much as six-tenths of a percentage point to as low as a 1.3 percent annualized rate. The economy grew at a 2.0 percent rate last quarter, slowing from the January-March quarter’s brisk 3.1 percent pace.
“Trade protectionism continues to gum up US manufacturing largely by undermining business investment,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. Oxford Economics cut their forecast to an even-lower 1.3 percent. That would be a sharp slowdown in an economy that grew 3.1 percent in the first three months of the year and 2.0 percent in the second quarter. Federal Reserve regional branches in New York and Atlanta, however, said the new data pointed to stronger 2.1 percent growth for the July-September period.
Elsewhere, tumbling energy prices kept a lid on overall price gains for last month, as the Personal Consumption Expenditures price index was unchanged from July, falling short of economists’ expectations. Compared to August 2018, the PCE price index, which tracks costs for goods and services purchased by individuals, rose 1.4 percent, holding at the same rate for four months in a row and well below the central bank’s two percent target.
When volatile food and fuel prices are stripped out, the “core” price index for August gained a trivial 0.1 percent over July, but rose by a hotter 1.8 percent from a year ago. That closely-watched measure was fueled by steady gains in the costs of US services which pushed it to its highest level since January. – Agencies