U.S. consumer spending exhibited robust growth in July, indicating that the economy remains on stable footing as it enters the third quarter, despite growing concerns over the labor market. The Commerce Department’s report on Friday revealed a 0.5% rise in consumer spending, maintaining much of the momentum from the second quarter, when it significantly contributed to a 3.0% annualized growth in gross domestic product (GDP).
This increase in spending across various sectors, including motor vehicles, housing, utilities, and healthcare, underscores the resilience of the U.S. economy, even as inflationary pressures begin to moderate. According to the Bureau of Economic Analysis, the rise in consumer spending aligns with economists’ expectations and continues to play a crucial role in sustaining economic activity, which relies heavily on consumer behavior, accounting for more than two-thirds of the U.S. economy.
Despite the positive spending figures, the labor market showed signs of strain, with the unemployment rate climbing to 4.3% in July, its highest level in nearly three years. This uptick in unemployment has fueled speculation among financial markets and some economists that the Federal Reserve may consider a 50-basis-point rate cut during its upcoming policy meeting in September. However, the steady consumer spending may argue against such a drastic measure.
Federal Reserve Chair Jerome Powell recently hinted at an impending rate cut, citing concerns about the labor market's health. However, analysts like Conrad DeQuadros, senior economic advisor at Brean Capital, argue that the current spending growth does not warrant a significant rate reduction. "This is not the kind of spending growth associated with a recession," DeQuadros noted, suggesting that the economy's underlying strength could deter the Fed from implementing a half-point cut.
The report also highlighted moderate inflation, with the personal consumption expenditures (PCE) price index rising by 0.2% in July, consistent with the previous month's increase. Core inflation, which excludes food and energy prices, also grew by 0.2%, maintaining a 2.6% annual increase. These figures suggest that while inflation remains above the Fed's 2% target, the pressures are not intensifying, giving the central bank room to carefully consider its next policy move.
As the economy continues to show signs of resilience, consumer behavior remains a key indicator of overall economic health. "Consumer spending continues to surprisingly exceed all expectations, a clear indication that the economy continues to be in good shape," remarked Olu Sonola, head of U.S. economic research at Fitch Ratings.
The forthcoming employment report for August, expected next Friday, will likely play a pivotal role in determining the size of the Fed's rate cut in September. Most economists predict that the central bank will opt for a more conservative approach, given the current state of the economy and inflation trends. The Fed has maintained its policy rate in the 5.25%-5.50% range for over a year, following substantial rate hikes in 2022 and 2023.
David Alcaly, lead macroeconomic strategist at Lazard Asset Management, emphasized the importance of considering the long-term trajectory of rate cuts. "There's a lot of focus right now on the pace of rate cuts in the short term, but we believe it ultimately will matter more how deep the rate-cutting cycle goes over time," Alcaly stated.
As the Federal Reserve navigates these economic signals, the balance between sustaining growth and managing inflation will be critical in shaping the monetary policy landscape in the months ahead.
(Source:www.usnews.com)
This increase in spending across various sectors, including motor vehicles, housing, utilities, and healthcare, underscores the resilience of the U.S. economy, even as inflationary pressures begin to moderate. According to the Bureau of Economic Analysis, the rise in consumer spending aligns with economists’ expectations and continues to play a crucial role in sustaining economic activity, which relies heavily on consumer behavior, accounting for more than two-thirds of the U.S. economy.
Despite the positive spending figures, the labor market showed signs of strain, with the unemployment rate climbing to 4.3% in July, its highest level in nearly three years. This uptick in unemployment has fueled speculation among financial markets and some economists that the Federal Reserve may consider a 50-basis-point rate cut during its upcoming policy meeting in September. However, the steady consumer spending may argue against such a drastic measure.
Federal Reserve Chair Jerome Powell recently hinted at an impending rate cut, citing concerns about the labor market's health. However, analysts like Conrad DeQuadros, senior economic advisor at Brean Capital, argue that the current spending growth does not warrant a significant rate reduction. "This is not the kind of spending growth associated with a recession," DeQuadros noted, suggesting that the economy's underlying strength could deter the Fed from implementing a half-point cut.
The report also highlighted moderate inflation, with the personal consumption expenditures (PCE) price index rising by 0.2% in July, consistent with the previous month's increase. Core inflation, which excludes food and energy prices, also grew by 0.2%, maintaining a 2.6% annual increase. These figures suggest that while inflation remains above the Fed's 2% target, the pressures are not intensifying, giving the central bank room to carefully consider its next policy move.
As the economy continues to show signs of resilience, consumer behavior remains a key indicator of overall economic health. "Consumer spending continues to surprisingly exceed all expectations, a clear indication that the economy continues to be in good shape," remarked Olu Sonola, head of U.S. economic research at Fitch Ratings.
The forthcoming employment report for August, expected next Friday, will likely play a pivotal role in determining the size of the Fed's rate cut in September. Most economists predict that the central bank will opt for a more conservative approach, given the current state of the economy and inflation trends. The Fed has maintained its policy rate in the 5.25%-5.50% range for over a year, following substantial rate hikes in 2022 and 2023.
David Alcaly, lead macroeconomic strategist at Lazard Asset Management, emphasized the importance of considering the long-term trajectory of rate cuts. "There's a lot of focus right now on the pace of rate cuts in the short term, but we believe it ultimately will matter more how deep the rate-cutting cycle goes over time," Alcaly stated.
As the Federal Reserve navigates these economic signals, the balance between sustaining growth and managing inflation will be critical in shaping the monetary policy landscape in the months ahead.
(Source:www.usnews.com)