U.S. consumer spending flat in August, may provide strong base for economic growth in Q3

U.S. personal income came in line with consensus expectations, rising 0.2 percent sequentially in August. This is lower than previous month’s 0.4 percent rise. Real disposable personal income rose 0.1 percent. Meanwhile, consumers in the country took a slight breather in the month as personal consumption stayed flat. After removing price changes, real personal spending dropped 0.1 percent in August, the first decline since March.

Sluggishness in volumes of spending was concentrated in durable goods that had surged in July. In real terms, spending on durable goods continues to be 5.1 percent higher on a year-on-year basis. Personal spending was upwardly revised in July; however, it was because of prices as real spending growth continued to be the same. Increased prices in July also signified that real disposable income was downwardly revised.

Meanwhile, headline inflation in the U.S. stayed the same in August from an upwardly revised 1 percent year-on-year in July. Core PCE inflation accelerated slightly to 1.7 percent year-on-year in August from 1.6 percent in July. On a sequential basis, price pressures also increased slightly to 0.2 percent following two months of smaller 0.1 percent rises.

“Flat spending in August relative to rising income meant the personal saving rate drifted up to 5.7 percent (from 5.5 percent in June)”, said TD Economics in a research note.

The slight disappointment in August spending exerts certain downside risk to the forecast of 3 percent annualized consumer spending growth in the third quarter, stated TD Economics. However, the third quarter looks quite healthy and might see consumer spending giving a strong base for overall economic growth in the third quarter, according to TD Economics.

“For a data-dependent Federal Reserve, the slight pick-up in core inflation pressures is constructive for a rate hike later this year. As long as job growth holds up and wages continue to move higher, the Fed should have all the evidence it needs to move forward with a rate in December”, added TD Economics.