U.S. 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 U.S. economic activity, edged up 0.1% 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% instead of the previously reported 0.6% advance. Economists polled by Reuters had forecast consumer spending gaining 0.3% 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 U.S.-China trade war and slowing global growth.
The U.S. 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-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.2% 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% as previously reported. Economists had forecast core capital goods orders unchanged in August.
Core capital goods orders increased 1.1% on a year-on-year basis. Shipments of core capital goods rose 0.4% 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% 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 U.S. investment and exports,” adding that U.S. central bank contacts had told policymakers that trade policy uncertainty “has discouraged them from investing in their businesses.”
U.S. financial markets were little moved by the data.
INFLATION READINGS MIXED
The economy grew at a 2.0% annualized rate last quarter, slowing from the January-March quarter’s brisk 3.1% pace. The Atlanta Fed is forecasting gross domestic product rising at a 1.9% 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%.
The PCE price index rose 0.2% in July. In the 12 months through August, the PCE price index increased 1.4%, 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% last month after rising 0.2% in July. That lifted the annual increase in the so-called core PCE price index to 1.8% in August, the biggest gain since January, from 1.7% 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.
When adjusted for inflation, consumer spending gained 0.1% in August. This so-called real consumer spending increased 0.3% in July. Consumer spending surged at a 4.6% annualized rate in the second quarter, the fastest pace in 4-1/2 years.
Last month, spending on goods rose 0.1%, driven by outlays on recreational goods and motor vehicles. Spending on services increased 0.2%.
Personal income rose 0.4% in August after nudging up 0.1% in the prior month. Wages increased 0.6%. With income growth outpacing spending, savings rose to $1.35 trillion from $1.29 trillion in July.
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