According to a report by the Commerce Department published on Monday, almost immediately after the three-day central bank meeting in Jackson Hole, strong demand for cars resulted in greater consumer spending in July. However, inflation strangely failed to gain an uptick as a result of the pickup in consumption.
Consumer purchases rose 0.3 percent year-on-year in July compared to a revised upward 0.5 percent gain the preceding month, while overall incomes added 0.4 percent compared to 0.3 percent in June. However, the advance in the savings rate to 5.7 percent in July from 5.5 percent the previous month mars the picture, indicating that consumption could have gained more. The savings rate rebounded for the first time since March.
"This report is a mixed bag for the Fed. While the consumer sector is continuing to advance solidly, progress towards the Fed's inflation mandate has stalled," Michelle Girard of the Stamford, CT branch of RBS said.. "It strengthens the case for an increase in interest rates, but does not suggest urgency for policymakers to act in September."
Consumer spending drives slightly more than 70 percent of the US GDP, meaning these figures are key to the understanding of future Federal Reserve moves in the light of their cautious and determined approach.
Inflation-adjusted disposable incomes rose 0.4 percent in July as well.
These figures, generally regarded as optimistic, might suggest an acceleration in 3Q16 economic growth. However, most projections show a likely 3 percent growth in spending in 3Q16 compared to a 4.4 percent expansion in consumption in Q2. Dismal growth of an annualized 1.1 percent might have shown there is little correlation between credit-fueled spending and real economic growth, as many consumers are going deeper into debt, thus contributing to the pressure of anxiety over loan delinquencies and bubbles across the hotter sectors, stemming from ultra-loose monetary policies.
“The consumer is going to remain the main driver of growth,” Richard Moody of Birmingham, AL-based, Regions Financial Corp. said. “Continued improvement in the labor market is supporting income growth. It’s consistent with a solid third quarter.” Moody and Region Financial are expecting further gains in consumer spending.
Meanwhile, adding to a more realistic outlook, the price gauge in July remained flat month-on-month, and added only 0.8 percent year-on-year. The core price measure, one of the Fed’s main inflation indicators, which excludes food and fuel prices, added an annualized 1.6 percent in its fifth month of gains in July.
While durable goods performed well, with the 1.9 percent annualized gains in car purchases driving the broader expansion, purchases of non-durable goods slipped 0.1 percent in July — their first slide since February. Spending on services, however, added 0.2 percent.
Overall, the Commerce Department report is neither too upbeat nor gloomy, with all the figures falling in line with a persistent broader trend of inflation severely underperforming and hampering growth, while there are some moderate gains in consumer activity, most likely attributed to shifts in consumption standards, branding and pricing policies among retailers and wholesale venues.
