Cooling US consumer spending underscores risks to economy

A customer opens his wallet at a Macy's cash register on Black Friday in New York,  26 November 2010 - Reuters

WASHINGTON (Reuters): US consumer spending barely rose in August and business investment remained subdued amid lingering trade tensions, prompting economists to slash their economic growth estimates for the third quarter.

The reports on Friday from the Commerce Department, however, 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 a huge savings buffer.

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 Wells Fargo Securities, North Carolina, Senior Economist Tim Quinlan.

Consumer spending, which accounts for more than two-thirds of US 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 US-China trade war, which has sunk business investment and manufacturing.But with tariffs on  Chinese goods broadened to include consumer goods, spending is slowing. There are worries that weak business investment and sluggish profit growth could constrain companies’ ability to continue hiring more workers, and undermine consumer spending.

The tariffs are causing anxiety among consumers. Consumer confidence dropped significantly in September, a survey from the Conference Board showed this week.

A survey from the University of Michigan on Friday showed a small increase in sentiment this month, with consumers voicing rising levels of “economic uncertainty”.

Consumer spending surged at a 4.6% annualised rate in the second quarter, the fastest pace in four and a half years. Economists said August’s small gain put consumer spending on track to grow at between a 2.5% and 3% rate in the third quarter.

“Consumer spending had been robust somewhat earlier in the year so slowing is not too surprising,” said Daniel Silver, an economist at JPMorgan in New York. “But this cooling is happening a little more quickly and significantly than we had expected.”

In another report on Friday, the Commerce Department said orders for non-defence capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.2% in August, weighed down by weak demand for electrical equipment, appliances and components, and computers and electronic products. These so-called core capital goods orders were unchanged in July. Economists had forecast core capital goods orders unchanged in August.

Shipments of core capital goods rose 0.4% last month after falling 0.6% in July. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. Business investment declined at its steepest pace in three and a half years in the second quarter.

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% annualised rate. The economy grew at a 2% rate last quarter, slowing from the January-March quarter’s brisk 3.1% pace.