Neither rising prices nor the cooling job market have deterred consumers from cutting back on their spending—at least so far.
- Consumer spending rose 0.8% in July, the biggest increase since January.
- Consumer spending has been keeping the economy afloat, but economists say household budgets are being squeezed and it can’t keep up for long.
- Tougher requirements for credit cards, higher costs of living, and slower wage growth are all hurting consumers’ ability to spend.
U.S. consumer spending grew 0.8% in July, an acceleration from the 0.6% growth in June, and the largest increase since January, the Bureau of Economic Analysis said Thursday. After adjusting for inflation, spending grew 0.6%, still the fastest since January.
The “income” side of the household balance sheet didn’t match the surge in spending, as inflation-adjusted after-tax income actually fell 0.2%, the first decrease since June 2022. Wage growth has slowed down since last year as the job market has grown less favorable to workers.
Consumer spending, the main engine of U.S. economic growth, has kept humming along in recent months despite persistent fears that the Federal Reserve’s campaign of anti-inflation interest rate hikes will slow down business to the point of recession. Some economists said households will be forced to cut back sooner rather than later, especially once repayments on federal student loans resume in October.
“This is not sustainable,” James Knightley, chief international economist at ING, said in a commentary. “American consumers are running down savings and using their credit cards to finance a large proportion of this. With financial stresses becoming more apparent and student loan repayments restarting, a correction is coming.”
Shoppers may find it harder to finance those purchases in the days ahead. Banks have grown more reluctant to lend money in the wake of a string of bank failures this spring, leading to restricted credit card use.
Thursday’s PCE report also gave mixed news on inflation, similar to the Consumer Price Index’s measure earlier this month. Prices rose to 3.2% over the last 12 months, up from a 3% annual increase in June. However, prices only rose 0.2% from June to July, the same as from May to June, and a rate that would lead to low yearly inflation if it were kept up.
If PCE inflation rose at the same rate it has over the last three months, yearly inflation would only be 2.1%.
“It is becoming harder to dismiss the improvement in the inflation numbers as mere noise,” Ian Sheperdson, chief economist at Pantheon Macroeconomics, said in a commentary.